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CAPITAL
AND
POPULATIOl^:.
A STUDY
OF THE
ECOx\OMIC EFFECTS OF THEIR RELATIONS
TO EACH OTHER.
BY
FREDEKICK B. HAWLEY.
, " o° J . >»
NEW YORK:
D. APPLETON AND COMPANY,
1, 8, AND 5 BOND STREET.
1882.
COPTBIGHT BY
D APPLETON AND COMPANY,
1882.
HBir/
PREFACE.
My position as an economist, as exemplified in this
treatise, is a peculiar one. While classing myself, I
believe justly, as a strict disciple of what is usually
called the English or orthodox school, I have arrived
at results, in many instances, diametrically opposed to
theirs ; especially on the subjects of free trade and
taxation. On the other hand, my reasoning presup-
poses the falsity of most of the arguments heretofore
advanced in support of the very conclusions I uphold.
As I antagonize the results of one side and the meth-
ods of the other, I can look for friends in neither
camp. ]^evertheless, as the principle I have enunci-
ated really effects the reconciliation of two lines of
thought, apparently hopelessly divergent, I may, per-
haps, expect to be sustained by those of both sides who
prefer construction to destruction.
It would be false modesty in me to seem unaware
that the economic law I have attempted to establish
equals in its influence upon economic conclusions any
hitherto ascertained. Granted its truth, it throws new
M850521
iv PREFACE.
and decisive light on nearly all the unsolved problems
of the science. That it is true, I venture to be the
more confident of, because I find it conceded bj both
Mill and Kicardo, although thej failed to apply it, or at
all recognize its importance. What I have here at-
tempted is to reason on their lines beyond the limit
where they stopped, with the result of greatly modify-
ing and sometimes subverting their conclusions. This
I have done without in any case impugning their pre-
mises, or controverting their reasoning, further than to
show that, while otherwise valid, it was incomplete. My
anxiety to place myself in accord with, rather than in
antagonism to, these great thinkers has been so great
as to lead me to injure the literary form of my work
by making it substantially a critique upon Mill's "Prin-
ciples " instead of an independent and consecutive argu-
ment. This has necessitated long quotations, already so
familiar to students as to lack interest for them. The
importance of showing that my ideas are really but the
further development of those of the orthodox school
must be my excuse for this ; and I shall be pardoned if
it has enabled me, as I believe it has, to more readily
place the law I enunciate, and in some degree eluci-
date, in its proper relation to the established truths of
the science.
Frederick B. Hawlet.
New York, February^ 1882,
COlsTTEIfTS
CHAFTEE PAGE
I. — Capital ...... 5
II. — Increase of Capital . . . . 13
III. — The Tendency of Capital to oijtsteip Population 51
IV.— Fixed Capital . . . . .64
V. — Panics ...... 77
VI. — Ceedit . , . . . .97
VII. — Wages and Pkofits . . . . 113
VIII. — Capital and Labob . . . .130
IX. — Co-opeeation . . . . . 139
X. — Feee Teade and Peoteotion . . .144
XI. — The Equation of International Demand . 175
XII. — Disteibution of Wealth in a Peotected Nation 204
XIII.— Rent ....... 210
XIV. — Commerce ..... 214
XV. — Ultimate Effects of Feee Teade and Peotection 224
XVI.— Taxation 235
XVII. — Some othee Effects of the Law . . 251
XVIII.— Conclusion 262
,.)„»»»
CAPITAL AND POPULATION,
CHAPTER I.
CAPITAL.
John Stuart Mill, in his "Principles of Political
Economy," in defining capital, says :
" The distinction, then, between capital and not-capital, does not
lie in the kind of commodities, but in the mind of the capitalist — in
his will to employ them for one purpose rather than another ; and
all property, however ill adapted in itself for the use of laborers, is
a part of capital, so soon as it, or the value to be received from it, is
set apart for productive reinvestment. The sum of all the values so
destined by their respective possessors, composes the capital of the
country. Whether all those values are in a shape directly appli-
cable to productive uses, maJces no difference. Their shape, whatever
it may he, is a temporary accident ; hut, once destined for produc-
tion, they do not fail to find a way of transforming themselves into
things capable of being applied to if'' — (Mill, Book I, chapter iv, sec-
tion 1.)
In Hicardo's works, chapter v, " On Wages," page 51,
I find the following definition :
" Capital is that part of the wealth of a country which is em-
ployed in production, and consists of food, clothing, raw materials,
machinery, etc., necessary to give effect to labor.'''*
6 CAPITAL AND POPULATION.
It is evident that these definitions differ radically, es-
pecially in'tHe/passagesfY-'.hi^ihjI have put in italics.
Mill includes, in the ^rm, all wealth destined to ^vo-
ductive'''V.QCijqiliptip'n^;VrhetKer. fi^^ utilized or not.
Until the mental disposition of the holder is changed, it
remains capital, and only ceases to be such when its des-
tination is changed to unproductive consumption. He
also includes, not only the necessaries and conveniences
that will, or may, actually be demanded by the laborer as
wages and for the facilities and tools for production, but
also the sum of such luxuries as are destined, before be-
ing consumed, to be exchanged for such necessaries and
conveniences.
Ricardo's meaning is not so clear, on account of the
ambiguity of the words " is employed." He seems, how-
ever, to intend to confine the term to that part of wealth
actually in process of consumption by the laborer for his
sustenance, or actually being used by him, as tools or
machinery, to facilitate production, and to exclude not
only all wealth not fitted for consumption or use by la-
borers, but such part as is fitted, but not at the time so
employed. If this is his meaning, circulating capital be-
comes identical with what is commonly called " the wages
fund," and fixed capital with such part of the machinery,
tools, etc., as are actually in use.
It may be, though I do not so understand him, that
by " is employed " he means, is eventually employed —
in which case his definition approaches nearer to that of
Mill, but is yet far from being identical with it.
If we attempt to gather his meaning from his writ-
ings, we shall find that he uses the term, not only in ac-
cordance with both senses of his own definition, though
with the first far more often than with the second, but
CAPITAL. 7
also with the sense in which Mill has defined it. And
the same remark will apply to the writings of Mill, who
likewise uses it, not only in accordance with his own defi-
nition, but in accordance with both senses of Ricardo be-
sides. Mill, indeed, seems utterly oblivious of the fact
that his definition differs at all from that of his predeces-
sor ; while Ricardo, in passages, exhibits some perception,
or rather, perhaps, I should say, an indistinct feeling of
the distinction to which I am drawing attention. Among
others, I would instance the note to chapter viii, in
which he says :
*' There can be no greater error than in supposing that capital is
increased by non-consumption. If the price of labor should rise so
high that, notwithstanding the increase of capital, no more could
be employed, I should say that such increase of capital would be
still unproductively consumed."
Ricardo, as we shall see elsewhere,* and as this passage
shows, perceived and acknowledged that an increase of
capital, in Mill's sense of the term, does not always lead
to an increase in his, although his arguments constantly
assume that an increase of wealth does practically result
in an increase of the wages fund and an increased produc-
tion. He here perceives the dilemma, and attempts to es-
cape from it by the assertion that such increase of capital
is still " unproductively consumed " — i. e., is not capital
at all. But in no sense is this true. It is not unproduc-
tively consumed in any way or shape, but eventually,
though not immediately, productively consumed. He
can, if he so chooses to use the word, refuse to call it
capital, but he can not claim that it is unproductively
consumed, for it is not consumed at all.
* For a further instance, see chapter on wages and profit.
8 CAPITAL AND POPULATION.
I shall assume throughout this treatise that Ricardo
intends to denote, bj capital, onlj such portion of wealth
as is actively engaged in production, as it will appear, in
the course of the argument, that most of his deductions
only hold good when the word is used in this exceedingly
restricted sense; and no student of this most exact of
deductive reasoners can doubt for a moment his intention
of using the term mainly in accordance with the deduc-
tions he draws from it. Places can, indeed, be found in
his writings where he gives to it a broader signification,
and adopts more or less fully its popular use ; but when
this occurs, the fault must be attributed rather to the
application than to the accuracy of his deductions.
The assertion that both Ricardo and Mill used such a
fundamental term as capital in various senses, without
perceiving that they did so, is a bold one for any one to
make, but it has been forced upon me by a careful, and I
may say reverential, study of their writings ; and I shall,
I am sure, be borne out in it by fellow-students when
their attention is drawn to the subject. This at least is
patent even at this stage of the inquiry, that they defined
the term very differently ; and it will be acknowledged
by all that, starting thus from conflicting definitions, they
proceed by the same arguments to identical conclusions.
This could hardly have been the case if they had really
differed in their understanding of the nature of capital ;
and I do not fear to assert that in similar parts of their
argument they rarely do differ in the sense in which they
use the term, notwithstanding the radical difference in
their definition of it.
Which definition is correct must be our next consid-
eration ; and there can be no doubt but that the prefer-
ence must be given to that of Mill. We already have a
CAPITAL. 9
term, viz., the " wages fund," which accurately coincides
with " circulating capital " as defined by Ricardo ; and a
supplementary term can only lead to the further confusion
of an intricate subject, while a term to define active fixed
capital from idle is not needed. The popular use of the
word certainly accords with Mill's definition; and the
scientific sense should certainly agree with the popular,
in considering as capital all wealth destined to be em-
ployed productively, and from which an increase is ob-
tained or hoped for.
Ricardo's definition differs so much from the popular
use of the word, that conclusions drawn from it, however
correct, are sure to be misunderstood and misapplied
in practice. Eeally valuable results are with difficulty
reached, and, when reached, with difficulty appreciated,
when the words in which they are expressed are ambigu-
ous. Furthermore, the real object of inquiry is, not how
production is effected by the increase of the wages fund
— that is a simple matter ; but by the general increase of
wealth in all its forms — a much more complicated subject.
I would myself prefer a definition of the term, when
scientifically used, broader than that of Mill, but not
broader than its popular use. "Wealth I would define as
the existent products of labor, whose utility is not yet
exhausted ; capital, as that portion of wealth from which
an income or profit is expected in addition to a return
of the principal. Under this definition national capital
would be the same as under MilFs, for no wealth not
productively employed can add to the net income of the
community, but much wealth not productively employed
nevertheless produces an income or profit to its possessors.
All that part of wealth reserved from immediate for pro-
longed unproductive consumption, such as houses, places
10 CAPITAL AND POPULATION.
of amusement, works of art, etc., the use and enjoyment
of which are a source of income to their possessors, I
would prefer to regard as capital to them, though not of
course to the community, because to their possessors they
are productive. The distinction does not affect this argu-
ment, and is of no great importance, further than to no-
tice that such wealth is of no less advantage to the nation
than that productively engaged, as, although it adds noth-
ing to the sum of material products, it immediately grati-
fies desires similar to those ultimately satisfied by material
products, and on account of which alone material products
have any utility.
Using Mill's or my own definition of capital, it will be
necessary to divide it into two portions, which we will
call " dead stock " and " active stock " : active stock be-
ing coincident with that portion of wealth that Ricardo
defines as capital, according to our first exemplification
of his meaning — ^i. e., all wealth that is at the time pro-
ductively engaged ; and dead stock being that portion
excluded by him and included by Mill — i. e., all wealth
destined eventually, but not immediately, to be employed
in production.
This distinction is of the first importance, and must
be constantly borne in mind during any discussion and
investigation of the laws and nature of capital. Al-
though distinctly recognized by all economists,* I know
* Mill, Book I, chapter iv, section 2 : "As whatever of the produce
of the country is devoted to production is capital, so, conversely, the
whole of the capital of the country is devoted to production. This sec-
ond proposition, however, must be taken with some limitations and ex-
planations. A fund may be seeking for productive employment, and find
none adapted to the inclinations of its possessor ; it then is capital still,
but unemployed capital. Or the stock may consist of unsold goods, not
susceptible of direct application to productive uses, and not, at the mo-
CAPITAL. 11
of none who have realized its importance, or who have
consistently observed it in their arguments. They, one
and all, assume that the amount of production depends
upon the amount of capital, whereas it is really depend-
ent only on the amount of "active stock," as will be
immediately acknowledged by every one who gives
the subject a moment's consideration. Ricardo would
have been an exception to this criticism, if he had always
been consistent with his own definition, faulty as it is.
He identified " active stock " and capital ; but, if he had
fully appreciated the distinction, he could hardly have
failed to recognize that he was defining a part of capital
as if it were the whole, and that his deductions were not
true of the term in its broad sense. More than any other
economist, his views coincide with mine, and it is mainly
owing to his failure to perceive this distinction that our
conclusions differ so radically.
It is as a pupil of his and of Mill that I write, and I
wish to be distinctly understood as accepting nearly all
the premises and conclusions in both of them not here
especially controverted, and to draw attention to the fact
that all of my premises, both so far and yet to be ad-
vanced, are theirs also with a single exception — the effect
ment, marketable ; these, until sold, are in the condition of unemployed
capital. Again, artificial or accidental circumstances may render it neces-
sary to possess a larger stock in advance — that is, a larger capital before
entering on production— than is required by the nature of things. Sup-
pose that the government lays a tax on the production in one of its earlier
stages, as, for instance, by taxing the material. The manufacturer has to
advance the tax before commencing the manufacture, and is, therefore,
under a necessity of having a larger accumulated fund than is required
for, or is actually employed in, the production which he carries on. He
must have a larger capital to maintain the same quantity of productive
labor."
12 CAPITAL AND POPULATION.
of a high rate of wages upon population. That my con-
clusions are in many points different from theirs, is solely
due to their neglectiug to follow up their own arguments
to their proper termination. That they did not do so, we
shall see, later on, was due, not so much to the want of
logical acumen, as to the fact that there was nothing in
their surroundings to suggest further pursuit. The eco-
nomic condition of England apparently verified their
conclusions, and they were naturally satisfied with such
verification. I am especially anxious not to be classed in
the category of those who have attempted to confute,
without understanding, these great writers, but fear I
shall not wholly escape, as my conclusions will run
counter to some firmly-held opinions, and will conflict
with many interests, both national and individual ; but
I can do no more than proclaim myself their disciple,
and disclaim any attempt at refuting the founders of the
science. All I shall say is built upon them as a founda-
tion, and all I hope to accomplish is to raise their struc-
ture one story higher.
CHAPTEE II.
INCREASE OF CAPITAL.
All wealth, and therefore all capital, is the result of
abstinence. The products of labor may be consumed by
the producer, or may be exchanged for other products to
be consumed, or such products, whether made by him or
acquired, may be reserved for personal consumption ; in
which cases they are said to be unproductively consumed.
If, on the other hand, the producer desires to save what
he has brought into being, he can do so in two ways : by
employing it as active, or retaining it as dead, stock. He
can employ it immediately in sustaining himself and oth-
ers while engaged in further production, if its nature is
fitted for such use ; or he can, as soon as possible, exchange
it for such things as are so fitted, and then employ them
productively ; or, if he so elects, he can reserve his prod-
uct, or the things for which he has exchanged it, to be
ultimately but not immediately employed productively
by himself or others.
In a barbarous state of society, where each individual
endeavors to supply all his wants himself, nearly all prod-
uce destined for productive consumption immediately
takes the form of " active stock " ; * but, when division of
* By the term " active stock " I mean to include not only what is actu-
ally at the moment being consumed by the laborer, but also such stock as
14 CAPITAL AND POPULATION.
labor has been established, some reservation of products
must occur, at least sufficient to allow time for exchanges
to be effected.
With the exception of the food which farmers reserve
for the consumption of themselves, their cattle, and those
of their laborers whose wants they immediately supply,
very nearly all of the products of civilized labor enter
first into "dead stock." All products, which the pro-
ducer can not himself utilize, necessarily do so.
From this fund of " dead stock " products are distrib-
uted to the fund for unproductive consumption and to
that for productive consumption. What goes to the
former fund, decreases the amount of " dead stock " —
what goes to the latter, increases it, as the amount of pro-
duction is always, on the average, greater than that of
the productive consumption which produces it ; because,
when this ceases to be the case, the motive to produce is
taken away. But dead stock may not be distributed at
once to either fund, but may be reserved, to await contin-
gencies. Now, what is it that determines the proportion
in which the gross stock will be divided between these
three funds ?
Evidently the relative strength of the desires to accu-
mulate and to enjoy will determine the amount of the
fund for unproductive consumption, and the rate of profit
the amount of that for productive consumption ; but the
rate of profit itself depends upon the amount of dead
stock. Any increase of dead stock, other things (includ-
ing gold) remaining the same, lowers its money-value
without affecting money-wages ; or, if money- wages are
lowered, its money-value suffers a yet greater deprecia-
he will require to support him until the product he is engaged upon is com-
pleted, and which is preserved by him or for him, for that purpose.
INCREASE OF CAPITAL. 15
tion.* In the supposed circumstances proportional wages
must rise at the expense of profits. But if an increase of
dead stock lowers profits, and a decrease of profits dis-
courages the conversion of dead into active stock, it fol-
lows that the " wages-fund " will be smallest when dead
stock is relatively most abundant, and when the rate of
proportional wages is the highest. We are entitled, then,
to say that the amount of dead stock that will become
active depends upon the amount of dead stock itseK, and
varies inversely with it :
" When the production of a commodity is the effect of labor and
expenditure, whether the commodity is susceptible of unlimited
multiplication or not, there is a minimum value which is the essen-
tial condition of its being permanently produced. The value at any
particular time is the result of supply and demand ; and is always
that which is necessary to create a marTcet for the existing supply.
But unless that value is sufficient to repay the cost of production^ and
to afford^ besides, the ordinary expectation of profit^ the commodity
will not continue to le produced. Capitalists will not go on perma-
nently producing at a loss. They will not even go on producing at
a profit less than they can live upon. Persons whose capital is al-
ready embarked, and can not be easily extricated, will persevere for
a considerable time without profit, and have been known to perse-
vere even at a loss, in hope of better times. But they will not do so
indefinitely, or when there is nothing to indicate that times are
likely to improve. No new capital will be invested in an employ-
* This is not true, of course, when the increase of dead stock consists
wholly or largely of money. In such cases prices and profits will rise and
proportional wages fall, as happens whenever the currency is inflated. But
in all cases, when the increase of dead stock is due wholly to saving, there
will be no increase in the amount of money through the operations of ex-
change until after prices have been depressed by such increase of dead
stock disturbing the proportion between gold and other commodities. If
such increase of stock is universal, the world over, the depression of money
prices will be permanent, until such stock is unproductively consumed or
the production of gold increased.
16 CAPITAL AND POPULATION.
ment, unless there be an expectation, not only of some profit, but of
a profit as great (regard being had to the degree of eligibility of the
employment in other respects) as can be hoped for in any other oc-
cupation at that time and place. "When such profit is evidently not
to be had, if people do not actually withdraw their capital, they at
least abstain from replacing it when consumed. The cost of pro-
duction, together with the ordinary profit, may, therefore, be called
the necessary price or value of all things made by labor and capital.
Nobody willingly produces in the prospect of loss. Whoever does
so, does it under a miscalculation, which he corrects as fast as he
is able." — (Mill, Book III, chapter iii, section 1.)
We have supposed in the above argument that " oth-
er things remained the same." What was included under
that head was the state of the arts, social customs and
regulations, the natural fertility of the soil, and the num-
ber of the population. Improvement in the two former
conditions, or any increase in the two latter, will of course
allow of a corresponding increase of dead stock, without
its being followed by a rise of proportional wages and fall
in profits ; and such increase will go partly to swell the
wages-fund or active stock. It is only when the increase
of capital outstrips the others that a diminution of the
wages-fund and a rise of wages will occur. Economists
have, I believe universally, held that such diminution of
the wages-fund could be but temporary; because the
stimulus to population of a high rate of wages would,
before very long, readjust the ratio between capital and
population. But the real stimulus to population is not a
high rate of wages in the sense in which wages are com-
pared with profits, because that surely entails a lessening
of employment, but a low rate, because then nearly all
the members of the laboring class are earning something,
and the average of the necessities and comforts of life
that laborers, employed and unemployed, receive is then
INCREASE OF CAPITAL. 17
greater than when some are receiving high wages and
many are receiving none at all. In other words, the stim-
ulus to population is affected not by the rate of propor-
tional wages, as economists have hithero universally as-
sumed, but by the proportion between the gross amount
of the wages-fund and the number [of those depending
upon it for subsistence — a very different thing, for such
proportion is always the least when the rate of propor-
tional wages is highest.
The normal ratio between capital and population,
when disturbed by an increase of capital, can not there-
fore be restored by the stimulus to population afforded
by such increase ; because its tendency is not to stimu-
late, but to restrain. The proper proportion of dead
stock can only be restored, in the absence of exceptional
circumstances, by an increase of unproductive consump-
tion, which directly decreases the fund, or by converting
less of it into active stock, which indirectly decreases the
fund, by preventing further additions to it being made,
and thus allows the ordinary, or even a less than ordinary,
unproductive consumption to deplete it. But the former
of these causes can not, or rather will not, act, because,
when an excess of dead stock lessens both profits and the
wages-fund, neither capitalists nor laborers will have as
large incomes to expend, and they will consequently con-
sume less unproductively than before, instead of more,
and will thus retard instead of assist the readjustment.
An excess of dead stock can only be practically done
away with by decreasing production, and the only way to
escape the necessity of so doing is to prevent a growth
of capital faster than that of population.
The reader will please notice that I do not here as-
sert over-production to be an evil, but only that over-ac-
18 CAPITAL AND POPULATION.
cumulation leads necessarily to a lessened production, and
tliat such lessened production is an evil.
The importance of the preceding paragraphs to the
argument can hardly be overstated, and I emphasize them
by thus drawing attention to them, fearing from the
brevity of my statement that the importance of the prin-
ciples involved will not be enough considered. They are
the only necessary premises that I nse, for which I am
unable to find any authority in Mill and Ricardo them-
selves. Their truth can not be doubted, nor can it be
gainsaid that, if Mill and Ricardo had taken notice of the
fact that increase of dead stock decreases active stock,
and restrains population instead of stimulating it, they
would have modified their conclusions very nearly, if not
quite, in accordance with mine.
I now desire to verify, by quotation and criticism, the
somewhat bold charge I have made in the preceding chap-
ter, that both these writers use the fundamental term " cap-
ital " loosely and inaccurately, and in conflicting senses.
In Book II, chapter xi, section 3, Mill says :
" Wages depend, then, on the proportion between the number
of the laboring population and the capital, or other funds, devoted
to the purchase of labor ; we will say, for shortness, the capital. If
wages are higher at one time or place than at another, if the sub-
sistence and comfort of the class of hired laborers are more ample,
it is for no other reason than because capital bears a greater propor-
tion to population. It is not the absolute amount of accumulation
or of production that is of importance to the laboring class ; it is
not the amount even of the funds destined for distribution among
the laborers ; it is the proportion between those funds and the num-
bers among whom they are shared. The condition of the class can
be bettered in no other way than by altering that proportion to
their advantage; and every scheme for their benefit, which does
not proceed on this as its foundation, is, for all permanent purposes,
a delusion."
INCREASE OF CAPITAL. 19
This passage singularly exemplifies Mill's confusion
of thought on the subject we are discussing. In his first
sentence, if he means by wages real wages, they depend
mainly on the margin of cultivation, and, in so far as
they are affected by it, do not depend directly but in-
versely on the amount of capital, as he defines it ; though
they do depend upon it in Ricardo's sense of the term.
If by wages he means proportional wages, they depend
not upon " the number of the laboring population," but
upon the ratio of the value of the wages-fund to the
value of the product. In his second sentence he treats
the two clauses, " if wages are higher at one time or place
than at another " and " if the subsistence and comfort of
the class of hired laborers are more ample," as identical
propositions. If he means by wages the rate of real
wages — i. e., the average sum- of necessaries and comforts
each laborer employed or unemployed receives — they are
identical ; but neither assertion is true, unless he uses capi-
tal in the sense of Ricardo ; and it is hardly supposable
that he does so use it, as it is very unlikely that he should
attach the importance he seems to, to so simple a state-
ment as that, the amount each laborer receives can be
found by dividing the wages-fund by the number of la-
borers, and yet that is all the statement will then include.
If he means proportional wages, and adheres to his own
definition of capital, they are not identical, as his propo-
sition is true as to the first clause and not true as to the
second. If he uses the term in Ricardo's sense, they are
likewise not identical, as the second is true and the first
not. Whichever way we interpret Mill's meaning, we
find an inaccuracy or an inconsistency.
Now let us compare Mill's account of the possible in-
crease of capital with that I have ventured to present..
20 CAPITAL AND POPULATIOK
In Book I, chapter v, section 3, lie says :
'^ While, on the one hand, industry is limited by capital, so, on
the other, every increase of capital gives, or is capable of giving,
additional employment to industry; and this without assignable
limit. I do not mean to deny that the capital, or part of it, may be
so employed as not to support laborers, being fixed in machinery,
buildings, improvement of land, and the like. In any large increase
of capital a considerable portion will generally be thus employed,
and will only co-operate with laborers, not maintain them. "What
I do intend to assert is, that the portion which is destined to their
maintenance may (supposing no alteration in anything else) be
indefinitely increased, without creating an impossibility of finding
them employment ; in other words, that if there are human beings
capable of work, and food to feed them, they may always be em-
ployed in producing something. This proposition requires to be
somewhat dwelt upon, being one of those which it is exceedingly
easy to assent to when presented in general terms, but somewhat
diflBcult to keep fast hold of in the crowd and confusion of the
actual facts of society. It is also very much opposed to common
doctrines. There is not an opinion more general among mankind
than this, that the unproductive expenditure of the rich is neces-
sary to the employment of the poor. Before Adam Smith, the doc-
trine had hardly been questioned ; and ever since his time, authors
of the highest name and of great merit* have contended that if
consumers were to save and convert into capital more than a limited
portion of their income, and were not to devote to unproductive
consumption an amount of means bearing a certain ratio to the capi-
tal of the country, the extra accumulation would be merely so much
waste, since there would be no market for the commodities which
the capital so created would produce. I conceive this to be one of
the many errors arising in political economy, from the practice of
not beginning with the examination of simple cases, but rushing at
once into the complexity of concrete phenomena. Every one can
see that if a benevolent government possessed all the food, and all
the implements and materials, of the community, it could exact pro-
ductive labor from all capable of it, to whom it allowed a share in
the food, and could be in no danger of wanting a field for the em-
* For example, Mr. Malthus, Dr. Chalmers, M. de Sismondi.
INCREASE OF CAPITAL. 21
ployment of this productive labor, since as long as there was a sin-
gle want unsaturated (which material objects could supply) of any-
one individual, the labor of the community could be turned to the
production of something capable of satisfying that want. Now, the
individual possessors of capital, when they add to it by fresh accu-
mulations, are doing precisely the same thing which we suppose to
be done by a benevolent government. As it is allowable to put any
case by way of hypothesis, let us imagine the most extreme case
conceivable. Suppose that every capitalist came to be of opinion
that, not being more meritorious than a well-conducted laborer, he
ought not to fare better ; and accordingly laid by, from conscien-
tious motives, the surplus of his profits; or suppose this abstinence
not spontaneous, but imposed by law or opinion upon all capitalists,
and upon land-owners likewise. Unproductive expenditure is now
reduced to its lowest limit ; and it is asked, How is the increased
capital to find employment ? Who is to buy the goods which it will
produce? There are no longer customers even for those which
were produced before. The goods, therefore (it is said), will remain
unsold; they will perish in the warehouses, until capital is brought
down to what it was originally, or rather to as much less, as the
demand of the consumers has lessened. But this is seeing only one
half of the matter. In the case supposed, there would no longer be
any demand for luxuries, on the part of capitalists and land-owners.
But when these classes turn their income into capital, they do not
thereby annihilate their power of consumption ; they do but trans-
fer it from themselves to the laborers to whom they give employ-
ment. Now, there are two possible suppositions in regard to the
laborers ; either there is, or there is not, an increase of their num-
bers, proportional to the increase of capital. If there is, the case
offers no difficulty. The production of necessaries for the new
population takes the place of the production of luxuries for a por-
tion of the old, and supplies exactly the amount of employment
which has been lost. But suppose that there is no increase of popu-
lation. The whole of what was previously expended in luxuries, by
capitalists and landlords, is distributed among the existing laborers,
in the form of additional wages. "We will assume them to be al-
ready sufficiently supplied with necessaries. What follows? That
the laborers become consumers of luxuries, and the capital previ-
ously employed in the production of luxuries is still able to employ
22 CAPITAL AND POPULATION".
itself in the same maDner; the difference being, that the luxuries
are shared among the community generally, instead of being con-
fined to a few. The increased accumulation and increased produc-
tion might, rigorously speaking, continue, until every laborer had
every indulgence of wealth, consistent with continuing to work;
supposing that the power of their labor were physically sufficient to
produce all this amount of indulgences for their whole number.
Thus the limit of wealth is never deficiency of consumers, but of
producers and productive power. Every addition to capital gives
to labor either additional employment, or additional remuneration ;
enriches either the country or the laboring class. If it finds addi-
tional hands to set to work, it increases the aggregate produce; if
only the same hands, it gives them a larger share of it ; and perhaps
even in this case, by stimulating them to greater exertions, aug-
ments the produce itself."
Even if we assent to every subsequent proposition in
this quotation, the assertion in the first sentence, that
" every increase of capital gives or is capable of giving
additional employment to industry, and this without as-
signable limit," is not true. If we suppose population to
keep pace with or increase faster than capital, the time
must eventually arrive when every capitalist and laborer
is reduced to the barest necessities ; and then a further
increase of capital can not lead to any increase in popula-
tion or production. Such further increase, which must
come entirely from rentals, would then surely fail to give
"additional employment or remuneration to industry."
If population did not increase as fast as capital, the time
would eventually arrive when all the population in
existence, willing to work for all they produced, would
be employed in the most advantageous manner that the
state of the arts would allow. An increase of capital,
then, coming from rent or wages (it could not come from
profits, as they would be annihilated), could give no
INCKEASE OF CAPITAL. 23
additional employment, for there would be no more
laborers to be set to work. There are then " assignable
limits" to capital, even under the wildest and most
improbable suppositions.
But, passing this, if we hold Mill to his definition, the
whole reasoning is unsound, for the infinite increase of
capital he supposes might go to the increase of dead and
not of active stock, as indeed it would, capitalists being
human ; in which case no more labor would be employed
than before it took place. If, on the other hand, by capi-
tal he means the wages-fund, his argument is true enough,
but more curious than valuable. Indeed, I fail to see how
it can in any sense be called political economy. I have
always conceived that science to be an inquiry into the
acquisition and distribution of wealth, not by disinterest-
edly benevolent beings, but by self-interested men. That
men will act in accordance with their real or supposed in-
terest, is the major premise of all economic reasoning. I
do not know to what science to refer an argument based
on the supposition that any class of men will not do so,
but I am quite certain that such science is not economic.
This whole quotation is an attempt to show what would,
or could, occur if capitalists were content to go on pro-
ducing with no hope of a gain. Is there a single eco-
nomic doctrine that can stand such a test ? What would
become of Malthus's theory of population, if laborers
would work without wages ? What of Kicardo's theory
of rent, if landlords and tenants were indifferent to the
rentals paid and received ? What of the proposition that
profits tended to equalization, if capitalists were careless
of what profit they obtained ? And yet we are asked to
believe that over-accumulation is impossible, because it
would be so if capitalists were indifferent to profit, and
^
24 CAPITAL AND POPULATIOIT.
we are scouted as ignorant visionaries if we venture to
suggest tliat it may be the cause of our periods of indus-
trial stagnation. Mill sajs :
"Authors, of the highest name and of great merit, have con-
tended that if consumers were to save and convert into capital more
than a limited portion of their income, and were not to devote to
unproductive consumption an amount of means bearing a certain
ratio to the capital of the country, the extra accumulation would be
merely so much waste, since there would be no market for the com-
modities which the capital, so created, would produce."
If he merely means to assert, following Say, that the
supply of commodities constitutes the demand, what he
says is true, but is inapplicable to the discussion. The word
" market," as used by his opponents, implies very much
more than he seems to suppose, and the sense in which
they use the word is its proper signification, both popu-
larly and scientifically. When men speak of a good or
bad market, they do not mean a market in which more
goods can be bought than can be sold, or vice versa^ but
they mean a market in which, at the going prices, goods
can be exchanged for such amount of money or other
things as will, when expended in production, more than
reproduce or less than reproduce the original things. If
the goods will buy more labor than it took to produce
them, the market is good ; if less, the market is poor.
Now insert before the word " market " the word '' remu-
nerative," and, tautological though it be, the addition
makes it evident that Mill's opponents have given a true
and valid reason for all their assertions.
I do not remember to have anywhere seen the obser-
vation that Say's principle, applied as Mill applies it,
proves as well that no single commodity can be in excess,
as that material commodities generally can not be so. No
INCREASE OF CAPITAL. 25
matter what the quantity of a single commodity, it would
exchange for something ; and we can not say of it that
more has been produced than can he exchanged^ and like-
wise we can not say this of commodities generally, but
we can say both of single commodities and material com-
modities in general, that more has been produced than
will he exchanged ; and this is all that there is any neces-
sity of affirming to establish the fact that over-accunwi-
lation and general glut can occur. In the sense of our dis-
cussion, labor is a commodity, though not a material one.
When the possibility of a general glut is asserted, it is not
meant that both labor and material commodities may be in
excess, but only that all material things may be in excess
as compared with labor — the one great immaterial com-
modity. In that sense, and it is the sense in which its ad-
vocates have really used the term, a more or less general
glut is not only a possible but a frequent occurrence.
As this is an important point in the discussion, I make
another quotation from Mill — premising that a "gen-
eral glut " is the result of over-accumulation and not of
over-production. Excessive production, supposing such a
thing possible, need not necessarily result in accumulation
at all. To affirm that over-production and over-accumu-
lation are equivalent things, can only be done on the sup-
position that Mill's definition of capital coincides with
Ricardo's; or, in other words, that all wealth destined
for productive consumption immediately constitutes the
wages-fund.
Accumulation will ordinarily be large when the pro-
duction is great, because production will not be great un-
less profits are high, and savings are mainly made from
profits; but there is no necessary connection between
them, as many things can intervene to prevent accumu-
26 CAPITAL AND POPULATION.
lation in sucli times. There is, of course, a tendency for
rapid production to result in excessive accumulation ; and
it is the counteraction of this tendency that Mill argues
against and that I advocate.
To fully present Mill's reasoning to the reader, I here
quote at great length from Book III, chapter xiv, sec-
tion 1 :
"After the elementary exposition of the theory of money con-
tained in the last few chapters, we shall return to a question in the
general theory of value, which could not be satisfactorily discussed
until the nature and operations of money were in some measure
understood, because the errors, against which we have to contend,
mainly originate in a misunderstanding of these operations.
*' We have seen that the value of everything gravitates toward a
certain medium point (which has been called the natural value),
namely, that at which it exchanges for every other thing in the ratio
of their cost of production. We have seen, too, that the actual or
market value coincides, or nearly so, with the natural value only
on an average of years, and is continually either rising above or
falling below it, from alterations in the demand, or casual fluctuations
in the supply ; but that these variations correct themselves, through
the tendency of the supply to accommodate itself to the demand
which exists for the commodity at its natural value. A general con-
vergence thus results from the balance of opposite divergences.
Dearth, or scarcity, on the one hand, and over-supply, or, in mercan-
tile language, glut, on the other, are incident to all commodities.
In the first case the commodity affords to the producers or sellers,
while the deficiency lasts, an unusually high rate of profit; in the
second, the supply being in excess of that for which a demand
exists, at such a value as will afford the ordinary profit, the sellers
must be content with less, and must, in extreme cases, submit to a
loss.
*' Because this phenomenon of over-supply, and consequent incon-
venience or loss to the producer or dealer, may exist in the case of
any one commodity whatever, many persons, including some dis-
tinguished political economists, have thought that it may exist with
regard to all commodities ; that there may be a general over-pro-
INCREASE OF CAPITAL. 27
duction of wealtli ; a supply of commodities in the aggregate, sur-
passing the demand; and a consequent depressed condition of all
classes of producers. Against this doctrine, of which Mr. Malthus
and Dr. Chalmers in this country, and M. de Sismondi on the Con-
tinent, were the chief apostles, I have already contended in the
First Book ; * but it was not possible, in that stage of our inquiry,
to enter into a complete examination of an error (as I conceive) es-
sentially grounded on a misunderstanding of the phenomena of value
and price.
" The doctrine appears to me to involve so much inconsistency
in its very conception, that I feel considerable difficulty in giving
any statement of it which shall be at once clear, and satisfactory to
its supporters. They agree in maintaining that there may be, and
sometimes is, an excess of productions in general beyond the de-
mand for them; that when this happens, purchasers can not be
found at prices which will repay the cost of production with a profit ;
that there ensues a general depression of prices or values (they
are seldom accurate in discriminating between the two), so that
producers, the more they produce, find themselves the poorer, in-
stead of richer ; and Dr. Chalmers accordingly inculcates on capital-
ists the practice of a moral restraint in reference to the pursuit of
gain ; while Sismondi deprecates machinery, and the various inven-
tions which increase productive power. They both maintain that
accumulation of capital may proceed too fast, not merely for the
moral but for the material interests of those who produce and accu-
mulate ; and they enjoin the rich to guard against this evil by an
ample unproductive consumption.
" When these writers speak of the supply of commodities as out-
running the demand, it is not clear which of the two elements of
demand they have in view — the desire to possess, or the means of
purchase ; whether their meaning is that there are, in such cases,
more consumable products in existence than the public desires to
consume, or merely more than it is able to pay for. In this uncer-
tainty, it is necessary to examine both suppositions.
" First, let us suppose that the quantity of commodities produced
is not greater than the community would be glad to consume ; is it,
in that case, possible that there should be a deficiency of demand
■a, pp. 41-43.
28 CAPITAL AND POPULATION.
for all commodities, for want of the means of payment? Those who
think so, can not have considered what it is which constitutes the
means of payment for commodities. It is, simply, commodities
Each person's means of paying for the productions of other people
consists of tliose which he himself possesses. All sellers are inevita-
bly, and by the meaning of the word, buyers. Could we suddenly
double the productive powers of the country, we should double the
supply of commodities in every market ; but we should, by the same
stroke, double the purchasing power. Everybody would bring a doub-
le demand as well as supply ; everybody would be able to buy twice
as much, because every one would have twice as much to offer in ex-
change. It is probable, indeed, that there would now be a superfluity
of certain things. Although the community would willingly double
its aggregate consumption, it may akeady have as much as it desires
of some commodities, and it may prefer to do more than double its
consumption of others, or to exercise its increased purchasing power
on some new thing. If so, the supply will adapt itself accordingly,
and the values of things will continue to conform to their cost of pro-
duction. At any rate, it is a sheer absurdity that all things should
fall in value, and that all producers should, in consequence, be in-
sufficiently remunerated. If values remain the same, what becomes
of prices is immaterial, since the remuneration of producers does
not depend on how much money but on how much of consumable
articles they obtain for their goods. Besides, money is a commodity ;
and if all commodities are supposed to be doubled in quantity, we
must suppose money to be doubled too, and then prices would no
more fall than values would.
" A general over-supply, or excess of all commodities above the
demand, so far as demand consists in means of payment, is thus
shown to be an impossibility. But it may, perhaps, be supposed
that it is not the ability to purchase, but the desire to possess, that
falls short, and that the general produce of industry may be greater
than the community desires to consume — the part, at least, of the
community which has an equivalent to give. It is evident enough
that produce makes a market for produce, and that there is wealth
in the country with which to purchase all the wealth in the coun-
try ; but those who have the means may not have the wants, and
those who have the wants may be without the means. A portion,
therefore, of the commodities produced may be unable to find a
mOREASE OF CAPITAL. 29
market, from the absence of means in those wlio have the desire to
consume, and the want of desire in those who have the means.
"This is much the most plausible form of the doctrine, and does
not, like that which we first examined, involve a contradiction.
There may easily be a greater quantity of any particular commodity
than is desired by those who have the ability to purchase, and it is
abstractedly conceivable that this might be the case with all com-
modities. The error is in not perceiving that, though all who have
an equivalent to give might be fully provided with every consum-
able article which they desire, the fact that they go on adding to
the production proves that this is not actually the case. Assume
the most favorable hypothesis for the purpose, that of a limited
community, every member of which possesses as much of necessa-
ries and of all known luxuries as he desires ; and since it is not
c(mceivable that persons whose wants were completely satisfied
would labor and economize to obtain what they did not desire,
suppose that a foreigner arrives, and produces an additional quan-
tity of something of which there was already enough. Here, it will
be said, is over-production ; true, I reply ; over-production of that
particular article : the community wanted no more of that, but it
wanted something. The old inhabitants, indeed, wanted nothing ;
but did not the foreigner himself want something? When he pro-
duced the superfluous article, was he laboring without a motive?
He has produced, but the wrong thing instead of the right. He
wanted, perhaps, food, and has produced watches, with which
everybody was sufficiently supplied. The new-comer brought with
him into the country a demand for commodities equal to all that he
could produce by his industry, and it was his business to see that
the supply he brought should be suitable to that demand. If he
could not produce something capable of exciting a new want or
desire in the community, for the satisfaction of which some one
would grow more food and give it to him in exchange, he had the
alternative of growing food for himself; either on fresh land, if
there was any unoccupied, or as a tenant, or partner, or servant, of
some former occupier, willing to be partially relieved from labor.
He has produced a thing not wanted, instead of what was wanted ;
and he himself, perhaps, is not the kind of producer who is wanted ;
but there is no over-production; production is not excessive but
merely ill-assorted. We saw before that whoever brings additional
30 CAPITAL AND POPULATION.
commodities to the market, brings an additional power of purchase ;
we now see that he brings also an additional desire to consume ;
since, if he had not that desire, he would not have troubled himself
to produce. Neither of the elements of demand, therefore, can be
wanting when there is an additional supply ; though it is perfectly-
possible that the demand may be for one thing, and the supply may
unfortunately consist of another.
"Driven to his last retreat, an opponent may perhaps allege
that there are persons who produce and accumulate from mere
habit; not because they have any object in growing richer, or
desire to add in any respect to their consumption, but from vis
inerticB. They continue producing because the machine is ready
mounted, and save and reinvest their savings because they have
nothing on which they care to expend them. I grant that this is
possible, and in some few instances probably happens; but these do
not in the smallest degree affect our conclusion. For, what do these
persons do with their savings? They invest them productively ; *
that is, expend them in employing labor. In other words, having a
purchasing power belonging to them, more than they know what to
do with, they make over the surplus of it for the general benefit of
the laboring class. Now, will that class also not know what to do
with it ? Are we to suppose that they too have their wants per-
fectly satisfied, and go on laboring from mere habit? Until this is
the case ; until the working classes have also reached the point of
satiety — there will be no want of demand for the produce of capital,
however rapidly it may accumulate ; since, if there is nothing else
for it to do, it can always find employment in producing the neces-
saries or luxuries of the laboring class. And when they too had no
further desire for necessaries or luxuries, they would take the benefit
of any further increase of wages by diminishing their work ; so that
the over-production, which then. for the first time would be possible
in idea, could not even then take place in fact, for want of laborers.
Thus, in whatever manner the question is looked at, even though we
go to the extreme verge of possibihty to invent a supposition favor-
able to it, the theory of general over-production implies an absurdity.
* That is just what they do not do — they add them to dead stock, and
keep them inactive until the rate of profit tempts them to employ them
productively.
INCREASE OF CAPITAL. 31
" What, then, is it by which men who have reflected much on
economical phenomena, and have even contributed to throw new
light upon them by original speculations, have been led to embrace
so irrational a doctrine? I conceive them to have been deceived by
a mistaken interpretation of certain mercantile facts. They imag-
ined that the possibility of a general over-supply of commodities was
proved by experience. They believed that they saw this phenome-
non in certain conditions of the markets, the true explanation of
which is totally different.
" I have already described the state of the markets for commodi-
ties which accompanies what is termed a commercial crisis. At
such times there is really an excess of all commodities above the
money-demand ; in other words, there is an under-supply of money.
From the sudden annihilation of a great mass of credit, every one
dislikes to part with ready money, and many are anxious to procure
it at any sacrifice. Almost everybody, therefore, is a seller, and
there are scarcely any buyers : so that there may really be, though
only while the crisis lasts, an extreme depression of general prices
from what may be indiscriminately called a glut of commodities or
a dearth of money. But it is a great error to suppose, with Sis-
mondi, that a commercial crisis is the effect of a general excess of
production. It is simply the consequence of an excess of specula-
tive purchases. It is not a gradual advent of low prices, but a sud-
den recoil from prices extravagantly high : its immediate cause is a
contraction of credit, and the remedy is not a diminution of supply,
but the restoration of confidence. It is also evident that this tem-
porary derangement of markets is an evil only because it is tempo-
rary. The fall being solely of money-prices, if prices did not rise
again no dealer would lose, since the smaller price would be worth
as much to him as the larger price was before. In no manner does
this phenomenon answer to the description which these celebrated
economists have given of the evil of over-production. That perma-
nent decline in the circumstances of producers, for want of markets,
which those writers contemplate, is a conception to which the nat-
ure of a commercial crisis gives no support.
" The other phenomenon from which the notion of a general ex-
cess of wealth and superfluity of accumulation seems to derive coun-
tenance, is one of a more permanent nature, namely, the fall of
profits and interest which naturally takes place with the progress of
32 CAPITAL AND POPULATION.
population and production. The cause of this decline of profit is the
increased cost of maintaining labor, which results from an increase
of population and of the demand for food outstripping the advance
of agricultural improvement. This important feature in the eco-
nomical progress of nations will receive full consideration and dis-
cussion in the succeeding book. It is obviously a totally different
thing from a want of market for commodities, though often con-
founded with it in the complaints of the producing and trading
classes. The true interpretation of the modern or present state of
industrial economy is, that there is hardly any amount of business
which may not de done if people will ie content to do it on small
profits; and this all active and intelligent persons in business per-
fectly well know : but even those who comply with the necessities
of their time, grumble at what they comply with, and wish that
there were less capital ; or, as they express it, less competition, in
order that there might be greater profits. Low profits, however,
are a different thing from deficiency of demand, and the production
and accumulations, which merely reduce profits, can not be called
excess of supply or production. What the phenomenon really is,
and its effects and necessary limits, will be seen when we treat of
that express subject.
"I know not of any economical facts, except the two I have
specified, which can have given occasion to the opinion that a gen-
eral over-production of commodities ever presented itself in actual
experience. I am convinced that there is no fact in commercial
affairs which, in order to its explanation, stands in need of that
chimerical supposition.
"The point is fundamental; any difference of opinion on it in-
volves radically different conceptions of political economy, especially
in its practical aspect. On the one view, we have only to consider
how a sufficient production may be combined with the best possible
distribution ; but, on the other, there is a third thing to be consid-
ered : how a market can be created for produce, or how production
can be limited to the capabilities of the market. Besides, a theory
so essentially self-contradictory can not intrude itself without carry-
ing confusion into the very heart of the subject, and making it im-
possible even to conceive with any distinctness many of the more
complicated economical workings of society. This error has been,
I conceive, fatal to the systems, as systems, of the three distinguished
INCREASE OF CAPITAL. 33
economists to whom I have referred — Malthus, Chalmers, and Sis-
mondi — all of whom have admirably conceived and explained several
of the elementary theorems of political economy ; but this fatal mis-
conception has spread itself, like a veil, between them and the more
difficult portions of the subject, not suffering one ray of light to
penetrate. Still more is this same confused idea constantly crossing
and bewildering the speculations of minds inferior to theirs. It is
bnt justice to two eminent names, to call attention to the fact that
the merit of having placed this most important point in its true
light belongs principally, on the Continent, to the judicious J. B.
Say, and in this country to Mr. Mill, who (besides the conclusive
exposition which he gave of the subject in his 'Elements of Polit-
ical Economy ') had set forth the correct doctrine with great force
and clearness in an early pamphlet, called forth by a temporary con-
troversy, and entitled 'Commerce Defended'; the first of his writ-
ings which attained any celebrity, and which he prized more as
having been his first introduction to the friendship of David Ricardo,
the most valued and most intimate friendship of his life."
It is, of course, needless to point out that here again
Mill uses capital in the sense of Ricardo. It will also be
noticed that over-accumulation and over-production are
not at all distinguished, and that arguments valid against
the latter are taken for granted as valid against the for-
mer also.
As to the argument, it is, of course, true v^hen money
and labor are considered as commodities ; but what the
advocates of over-accumulation assert, and what Mill is
really interested in denying, is only that the amount of
all material commodities can be and sometimes is excess-
ive. That this is what Mill opposes is evident from sec-
tion 4, in which he refuses to accept over-accumulation
as an explanation of panics. It would be too absurd to
suppose that any one claimed that panics were due to an
excess of labor as well as of material commodities ; and,
therefore, MiU's meaning must be that the excess of
34 CAPITAL AND POPULATION.
material commodities has no influence in leading to in-
dustrial stagnation. This is the objective point of his
whole argument, and all his disciples, notably Bonamj
Price and Fawcett, have so understood and accepted him,
and in the most unequivocal terms have attributed the
lessened production of such periods to the general pov-
erty resulting from the extravagance of preceding periods
of high profits and large production.
INow, it is evident that the whole argument, contained
in the 'quotation I have last made, is inapplicable to the
conclusion thus drawn. Fortunately, there is a test which
can not but be accepted, as decisive between the view of
Mill's disciples and my own, by any who doubt. To this
test I am anxious to draw the closest attention, as no one
who appreciates its significance can, I think, fail to agree
with me. If any particular panic and the period of
industrial idleness which follows it are caused 'by the
poverty of the community — i. e., hy the amount of mate-
rial commodities heing less than usual — the rate of profit
during such panic and period will he high {not the rate
of interest^ which is then liable to violent fluctuations and
does not at all indicate the rate of profit) ; for what capi-
tal is left in the community can not fail of finding profit-
aUe employment. If on the contrary^ the rate of profit
is low^ it can he due to no other cause than that capital
hears a larger proportion than usual to population.
In Book II, chapter viii, section 3, Mill, speaking of
prices, says :
" It is to be remarked that this ratio would be precisely that in
which the quantity of money had been increased. If the whole
money in circulation was doubled, prices would be doubled. If it
was only increased one fourth, prices would rise one fourth. There
would be one fourth more money, all of which would be used to
INOEEASE OF CAPITAL. 35
purchase goods of some description. When there had been time for
tbe increased supply of money to reach all markets, or (according to
the conventional metaphor) to permeate all the channels of circula-
tion, all prices would have risen one fourth. But the general rise
of prices is independent of this diffusing and equalizing process.
Even if some prices were raised more, and others less, the average
rise would be one fourth. This is a necessary consequence of the
fact that a fourth more money would have been given for only the
same quantity of goods. General prices, therefore, would in any
case be a fourth higher.
*' The very same effect would be produced on prices if we sup-
pose the goods diminished, instead of the money increased ; and the
contrary effect if the goods were increased, or the money dimin-
ished. If there were less money in the hands of the community,
and the same amount of goods to be sold, less money altogether
would be given for them, and they would be sold at lower prices ;
lower, too, in the precise ratio in which the money was diminished.
So that the value of money, other things being the same, varies in-
versely as its quantity; every increase of quantity lowering the
value, and every diminution raising it, in a ratio exactly equiva-
lent.
" This, it must be observed, is a property peculiar to money. We
did not find it to be true of commodities generally that every dimi-
nution of supply raised the value exactly in proportion to the defi-
ciency, or that every increase lowered it in the precise ratio of the
excess. Some things are usually affected in a greater ratio than
that of the excess of deficiency, others usually in a less ; because, in
ordinary cases of demand, the desire, being for the thing itself, may
be stronger or weaker; and the amount of what people are willing
to expend on it, being in any case a limited quantity, maybe affected
in very unequal degrees by difiiculty or facility of attainment. But
in the case of money, which is desired as the means of universal
purchase, the demand consists of everything which people have to
sell ; and the only limit to what they are willing to give, is the
limit set by their having nothing more to offer. The whole of the
goods being in any case exchanged for the whole of the money which
comes into the market to be laid out, they will sell for less or more
of it, exactly according as less or more is bought.
"From what precedes, it might for a moment be supposed that
36 CAPITAL AND POPULATION.
all the goods on sale in a country at any one time, are exchanged
for all the money existing and in circulation at that same time ; or,
in other words, that there is always in circulation in a country a
quantity of money equal in value to the whole of the goods then
and there on sale. But this would be a complete misapprehension.
The money laid out is equal in value to the goods it purchases; but
the quantity of money laid out is not the same thing with the quan-
tity in circulation. As the money passes from hand to hand, the
same piece of money is laid out many times, before all the things on
sale at one time are purchased and finally removed from the market ;
and each pound or dollar must be counted for as many pounds or
dollars as the number of times it changes hands, in order to effect
this object."
This passage supplies another test of whether any par-
ticular period of activity or stagnation is due to a large
or small amount of disposable wealth. If, for instance,
low prices generally prevail during a period of inactivity,
it shows that the stock of commodities must be large as
compared with the stock of money. If the industrial in-
activity is due to a scarcity of circulating capital, using
the term according to Mill's definition, prices should be
high, unless there has been an enormous exportation of
gold ; but the movement of gold — except when driven out
by an irredeemable currency, which then becomes money,
and, as far as prices are affected, supplies its function — is
always too insignificant to account for the variations in
general prices which occur, as will be evident when we
reflect that the rise or fall must always be mathematically
proportional ; that is, if the stock of commodities remains
the same, one quarter of the gold of the country must be
exported to account for a fall in general prices of twenty-
five per cent, and, if the stock of commodities has also
diminished, it would only account for a fall proportion-
ally less by the percentage of such diminution. We are
INCREASE OF CAPITAL. 37
forced, therefore, to account for such falls in general
prices by supposing that they are due to an actual in-
crease of material commodities. As prices are always
low during hard, and high during flush times, it neces-
sarily follows that it is during the former that the amount
of material wealth is greatest.
We see, therefore, that low prices prevailing during
any period of stagnation are an indication that the de-
pression is not caused by poverty, but by excessive accu-
mulations ; but they are not as good a test as that of low
profits. If any improvement be made, such, for instance,
as the establishment of a clearing-house, other things re-
maining the same, a certain amount of gold is not needed
and must be exported. This can only be effected through
a rise in prices. Kapidity of circulation tends to raise
prices, and sluggishness to depress them. During good
times, therefore, the greater efficiency of money tends to
raise prices beyond the point they would otherwise attain,
and during bad times its greater sluggishness correspond-
ingly depresses them. This produces the same effect
upon prices as the proportion between money and other
commodities, and low prices are not, therefore, as accurate
a test as low profits of the true cause of the industrial in-
activity, but they possess the advantage of being more
readily ascertained and compared.
Mill admits that any one commodity may be in ex-
cess. He must therefore also grant that all but one can
be so. If that one exception is labor, his opponents have
granted to them all they claim and he denies. Mill truly
" The point is fundamental ; any difference of opinion on it in-
volves radically different conceptions of political econoray, especially
in its practical aspect."
38 CAPITAL AND POPULATION
But he is at sea when he goes on to assert :
*' On the one view, we have only to consider how a sufficient
production raaj be combined with the best possible distribution ;
but, on the other, there is a third thing to be considered — how a
market can be created for produce, or how a production can be lim-
ited to the capabilities of the market."
The practical application of the theory of over-accu-
mulation involves no such considerations as he here sup-
poses. It indeed concerns itself with limiting the ten-
dency to accumulate, but it effects by this a greater not a
lessened production, and all it does to secure a " market "
is to endeavor to sustain a rate of profit under which pro-
duction can go on most readily.
As to Say's famous argument, with which I am in en-
tire accord, it is enough to call attention to the fact that,
though commodities, no matter how great their quantity,
will exchange for each other freely, if they are produced
in such proportions as to satisfy the desires of those who
exert an efficient demand, such proportions are ipso facto
not sustained when a certain and natural proportion be-
tween the demand for productive and for unproductive
consumption is not maintained. My whole position is
granted by Mill when he says, " The true interpretation of
the modern or present state of industrial economy is, that
there is hardly any amount of business which may not be
done, if people will be content to do it on small profits."
Yery well, then. Let us attribute our periods of indus-
trial inactivity to low profits. Nothing is more certain
than that people will cease pi^oducing as profits decline,
and that they must so decline when capital increases faster
than population.
I complain of Mill, not only that he is confused in his
theoretical conceptions as to capital and accumulation, but
INCREASE OF CAPITAL. 39
that he entirely failed to appreciate their practical bear-
ing upon production, as is evidenced by his attempt to
explain panics as due alone to the action of credit, and
by his constant exhortations to abstinence.
Let us now turn to Kicardo, who, in his chapter on
" Taxes on Kaw Produce," page 95, says :
"An accumulation of capital uaturally produces an increased
competition amoDg the employers of labor, and a consequent rise in
its price."
If in this sentence he uses the term " capital " accord-
ing to his own definition, he is not entitled to use the term
" accumulation of capital " at all, as applied to circulating
capital, which alone affects the competition for labor.
Capital, according to him, being merely the wages-fund,
does not become capital until it is expended, and is phys-
ically incapable of being accumulated ; or, if we suppose
him to include under capital funds set apart for the main-
tenance of the laborer until the product he is then en-
gaged upon is brought to market, there can be no increase
of the wages-fund beyond that amount. Anything set
apart for the employment of labor, beyond that at the
time employed, is not capital in his sense, but in Mill's.
But it is only such increase of capital that can affect the
competition for labor. The demand for and supply of
labor do not at all depend upon capital, in his sense of
the term. The wages-fund is the effect and not the cause
of the demand for labor. The word, therefore, must be
used in the sense in which Mill defines the term, and in
that sense his assertion is inaccurate.
Population being stationary, an increase of capital
beyond the limits I have pointed out decreases the de-
mand for labor. The demand for labor must, then, depend
40 CAPITAL AND POPULATIO^T.
upon something else. The proportion that determines
the demand is not between commodities already in exist-
ence and the number of laborers, but between the com-
modities needed, or supposed to be needed, sufficiently to
sell for a profit, and the number of laborers. It is not
between the accumulations of past production and labor,
but between the amount of future production and labor.
But the amount of future production supposed to be need-
ed will be least when things already in existence are most
plenty, and greatest when they are scarce, and the direct
opposite of Kicardo's assertion as to the demand for labor
is what really follows. As to its price, he is right if he
means relative price, but not otherwise.
As a rule, Kicardo is more faithful to his definition
than Mill is to his. Accepting his faulty definition, his
conclusions are accurately true. Mill, on the other hand,
persistently asserts Ricardo's conclusions as also true of
capital as he defines it, and is, therefore, much more at
fault than his predecessor. Sometimes, however, as in
our quotation, Ricardo himself applies conclusions only
true of the wages-fund to capital in its broader and truer
signification.
Although not strictly in the line of our argument, it
may be well here to notice the principle enunciated by
Mill, that the demand for commodities is not a demand
for labor, as it is connected with our subject, and its con-
sideration will throw additional light on the discussion.
This proposition has attained the place of the pons asi-
norum of political economy. It remains an insoluble
puzzle to most minds, as, although they perceive Mill's
reasoning to be irrefutable, they can not get rid of the
conviction tlmt it really makes no difference, in the amount
of labor that finds employment, whether it is employed
mCREASE OF CAPITAL. 41
directly by themselves or by the funds that they turn
over to others.
The proposition is enunciated in the following pas-
sage, Book I, chapter v, section 9, of Mill's work:
"We now pass to a fourth fandamental theorem respecting
capital, which is, perhaps, oftener overlooked or misconceived than
even any of the foregoing. What supports and employs productive
lahor is the capital expended in setting it to work, and not the de-
mand of purchasers for the produce of the labor when completed.
Demand for commodities is not demand for labor. The demand for
commodities determines in what particular branch of production
the labor and capital shall be employed ; it determines the direc-
tion of the labor, but not the more or less of the labor itself, or of
the maintenance or payment of the labor. These depend on the
amount of the capital or other funds directly devoted to the suste-
nance and remuneration of labor.
" Suppose, for instance, that there is a demand for velvet ; a
fund ready to be laid out in buying velvet, but no capital to estab-
lish the manufacture. It is of no consequence how great the de-
mand may be, unless capital is attracted into the occupation, there
will be no velvet made, and consequently none bought ; unless, in-
deed, the desire of the intending purchaser for it is so strong that
he employs part of the price he would have paid for it in making
advances to work-people, that they may employ themselves in mak-
ing velvet ; that is, unless he converts part of his income into capi-
tal, and invest that capital in the manufacture. Let us now reverse
the hypothesis, and suppose that there is plenty of capital ready for
making velvet, but no demand. Velvet will not be made ; but there
is no particular preference on the part of capital for making velvet.
Manufacturers and their laborers do not produce for the pleasure of
their customers, but for the supply of their own wants, and having
still the capital and the labor which are the essentials of production,
they can either produce something else which is in demand, or, if
there be no other demand, they themselves have one, and can pro-
duce the things which they want for their own consumption. So
that the employment afforded to labor does not depend on the pur-
chasers, but on the capital. I am, of course, not taking into con-
42 CAPITAL AND POPULATION.
sideration the effects of a sudden change. If the demand ceases un-
expectedly after the commodity to supply it is already produced, this
introduces a different element into the question ; the capital has actu-
ally been consumed in producing something which nobody wants or
uses, and it has therefore perished, and the employment which it
gave to labor is at an end, not because there is no longer a demand,
but because there is no longer a capital. This case, therefore, does
not test the principle. The proper test is to suppose that the change
is gradual and foreseen, and is attended with no waste of capital,
the manufacture being discontinued by merely not replacing the
machinery as it wears out, and not reinvesting the money as it
comes in from the sale of the produce. The capital is thus ready for
a new employment, in which it will maintain as much labor as before.
The manufacturer and his work-people lose the benefit of the skill
and knowledge which they had acquired in the particular business,
and which can only be partially of use to them in any other ; and
that is the amount of loss to the community by the change. But the
laborers can still work, and the capital which previously employed
them will, either in the same hands or by being lent to others, em-
ploy either those laborers or an equivalent number in some other
occupation.
'' This theorem — that to purchase produce is not to employ labor ;
that the demand for labor is constituted by the wages which pre-
cede the production, and not by the demand which may exist for
the commodities resulting from the production — is a proposition
which greatly needs all the illustration it can receive. It is, to com-
mon apprehension, a paradox ; and even among political economists
of reputation, I can hardly point to any, except Mr. Eicardo and M.
Say, who have kept it constantly and steadily in view. Almost all
others occasionally express themselves as if a person who buys
commodities, the produce of labor, was an employer of labor, and
created a demand for it as really, and in the same sense, as if he
bought the labor itself directly by the payment of wages. It is no
wonder that political economy advances slowly when such a ques-
tion as this still remains open at its very threshold. I apprehend
that if by demand for labor be meant the demand by which wages
are raised, or the number of laborers in employment increased, de-
mand for commodities does not constitute demand for labor. I
conceive that a person who buys commodities and consumes them
INCREASE OF CAPITAL. 43
himself does no good to the laboring classes ; and that it is only by
what he abstains from consuming and expends in direct payments to
laborers in exchange for labor, that he benefits the laboring classes
or adds anything to the amount of their employment.
"For the better illustration of the principle, let us put the fol-
lowing case : A consumer may expend his income either in buying
services or commodities. He may employ part of it in hiring jour-
neymen brick -layers to build a house, or excavators to dig artificial
lakes, or laborers to make plantations and lay out pleasure-grounds ;
or, instead of this, he may expend the same value in buying velvet
and laces. The question is, whether the difference between these
two modes of expending his income affects the interest of the labor-
ing classes. It is plain that in the first of the two cases he employs
laborers who will be out of employment, or, at least, out of that
employment in the opposite case. But those from whom I differ
say that this is of no consequence, because in buying velvet and lace
he equally employs laborers, namely, those who make the velvet
and lace. I contend, however, that in this last case he does not
employ laborers ; but merely decides in what kind of work some
other person shall employ them. The consumer does not, with his
own funds, pay to the weavers and lace-makers their day's wages.
He buys the finished commodity, which has been produced by labor
and capital, the labor not being paid nor the capital furnished by him,
but by the manufacturer. Suppose that he had been in the habit of
expending this portion of his income in hiring journeymen brick-
layers, who laid out the amount of their wages in food and clothing,
which were also produced by labor and capital. He, however, deter-
mined to prefer velvet, for which he thus creates an extra demand.
This demand can not be satisfied without an extra capital ; where,
then, is the capital to come from ? There is nothing in the consumer's
change of purpose which makes the capital of the country greater
than it otherwise was. It appears, then, that the increased demand
for velvet could not for the present be supplied were it not that the
very circumstance which gave rise to it has set at liberty a capital of
the exact amount required. The very sum which the consumer
now employs in buying velvet, formerly passed into the hands of
journeymen brick-layers, who expended it in food and necessaries,
which they now either go without, or squeeze by their competition
from the shares of other laborers. The labor and capital, therefore,
44 CAPITAL AND POPULATION.
which formerly produced necessaries for the use of these brick-layers
are deprived of their market, and must look out for other employ-
ment ; and they find it in making velvet for the new demand. I do
not mean that the very same labor and capital which produced the
necessaries turn themselves to producing the velvet ; but, in some
one or other of a hundred modes, they take the place of that which
does. There was capital in existence to do one of two things — to
make the velvet, or to produce necessaries for the journeymen brick-
layers; but not to do both. It was at the option of the customer
which of the two should happen; and if he chooses the velvet,
they go without the necessaries.
" For further illustration, let us suppose the same case reversed.
The consumer has been accustomed to buy velvet, but resolves to
discontinue that expense, and to employ the same annual sum in
hiring brick-layers. If the common opinion be correct, this change
in the mode of his expenditure gives no additional employment to
labor, but only transfers employment from velvet-makers to brick-
layers. On closer inspection, however, it will be seen that there is
an increase of the total sum applied to the remuneration of labor.
The velvet manufacturer, supposing him aware of the diminished
demand for his commodity, diminishes the production and sets at
liberty a corresponding portion of the capital employed in the manu-
facture. This capital, thus withdrawn from the maintenance of
velvet-makers, is not the same fund with that which the customer
employs in maintaining brick-layers ; it is a second fund. There
are, therefore, two funds to be employed in the maintenance and
remuneration of labor, where before there was only one. There is
not a transfer of employment from velvet-makers to brick-layers ;
there is a new employment created for brick-layers, and a transfer
of employment from velvet-makers to some other laborers, most
probably those who produce the food and other things which the
brick-layers consume.
*' In answer to this it is said that the money laid out in buying
velvet is not capital, it replaces capital ; that, though it does not
create a new demand for labor, it is the necessary means of en-
abling the existing demands to be kept up. The funds (it may be
said) of the manufacturer, while locked up in velvet, can not be
directly applied to the maintenance of labor ; they do. not begin to
constitute a demand for labor until the velvet is sold, and the capital
INOEEASE OF CAPITAL. 45
which raade it replaced from the outlay of the purchaser; and
thus, it may be said, the velvet-maker and the velvet-buyer have
not two capitals, but only one capital between them, which by the
act of purchase the buyer transfers to the manufacturer ; and if,
instead of buying velvet he buys labor, he simply transfers this
capital elsewhere, extinguishing as much demand for labor in one
quarter as he creates in another.
"The premises of this argument are not denied. To set free a
capital which would otherwise be locked up in a form useless for
the support of labor is, no doubt, the same thing to the interests of
laborers as the creation of a new capital. It is perfectly true that
if I expend £1,000 in buying velvet, I enable the manufacturer to
employ £1,000 in the maintenance of labor, which could not have
been so employed while the velvet remained unsold ; and if it would
have remained unsold for ever unless I bought it, then by changing
my purpose and hiring brick-layers instead, I undoubtedly create no
new demand for labor, for while I employ £1,000 in hiring labor on
the one hand, I annihilate for ever £1,000 of the velvet-maker's
capital on the other. But this is confounding the effects arising
from the mere suddenness of a change with the effects of the change
itself. If, when the buyer ceased to purchase, the capital employed
in making velvet for his use necessarily perished, then his expend-
ing the same amount in hiring brick- layers would be no creation, but
merely a transfer of employment. The increased employment which
I contend is given to labor, would not be given unless the capital
of the velvet-maker could be liberated, and would not be given
until it was liberated. But every one knows that the capital in-
vested in an employment can be withdrawn from it, if sufficient
time be allowed. If the velvet-maker had previous notice, by not
receiving the usual order, he will have produced £1,000 less velvet,
and an equivalent portion of his capital will have been already set
free. If he had no previous notice, and the article consequently
remains on his hands', the increase of his stock will induce him next
year to suspend or diminish his production until the surplus is car-
ried off. When this process is complete, the manufacturer will find
himself as rich as before, with undiminished power of employing
labor in general, though a portion of his capital will now be em-
ployed in maintaining some other kind of it. Until this adjustment
has taken place, the demand for labor will be merely changed, not
46 CAPITAL AND POPULATION.
increased ; but, as soon as it has taken place, the demand for labor
is increased. Where there was formerly only capital employed in
maintaining weavers to make £1,000 worth of velvet, there is now
that same capital employed in making something else, and £1,000
distributed among brick-layers besides. There are now two capitals
employed in remunerating two sets of laborers, while before one of
those capitals, that of the customer, only served as a wheel in the
machinery by which the other capital, that of the manufacturer,
carried on its employment of labor from year to year.
" The proposition for which I am contending is in reality equiva-
lent to the following, which to some minds will appear a truism,
though to others it is a paradox : that a person does good to labor-
ers, not by what he consumes on himself, but solely by what he
does not so consume. If, instead of laying out £100 in wine or silk,
I expend it in wages, the demand for commodities is precisely equal
in both cases ; in the one it is the demand for £100 worth of wine
or silk ; in the other, for the same value of bread, beer, laborers'
clothing, fuel, and indulgences : but the laborers of the community
have in the latter case the value of £100 more of the produce of
the community distributed among them. I have consumed that
much less, and made over my consuming power to them. If it were
not so, my having consumed less would not leave more to be con-
sumed by others, which is a manifest contradiction. When less
is not produced, what one person forbears to consume is necessarily
added to the share of those to whom he transfers his power of pur-
chase. In the case supposed I do not necessarily consume less ulti-
mately, since the laborers whom I pay may build a house forme, or
make something else for my future consumption. But I have at all
events postponed my consumption, and have turned over part of
my share of the present produce of the community to the laborers.
If after an interval I am indemnified, it is not from existing prod-
uce, but from a subsequent addition made to it. I have there-
fore left more of the existing produce to be consumed by others;
and have put into the possession of laborers the power to consume
it."
That tlie demand for commodities is not a demand for
labor as here enunciated assumes that productive con-
sumption can take the place of unproductive indefinitely,
mOREASE OF CAPITAL. 47
while the truth is, it can only do so for a limited pe-
riod, and must be followed bj a comparative increase of
unproductive, equal or greater in amount, usually the
latter. Let us vary Mill's illustration by supposing the
demand of the individual possessing £1,000 to be for
a house to live in, and that he will decide to buy a
house, or build for himself, according as either action
will most benefit the laboring classes. If he decides to
buy, his demand in principle is the same as if he ex-
pended the one thousand pounds for velvet. If he de-
cides to build, he undoubtedly gives additional employ-
ment to labor at the time. But if the society in which he
lives is increasing in capital faster than in population, or
will do so at some future time, sooner or later, some-
where in the land, a house will not be built which would
have been built if he had not anticipated such actiou. If,
at the time he builds, houses are already in excess, the
house that he would have bought if he had not built will
remain unoccupied, or will serve by lowering rentals as a
discouragement to others building, and he will only have
anticipated the demand for labor by a very short inter-
val. If there happens to be a scarcity of houses, his build-
ing one lessens that scarcity and will prevent others sup-
plying it by just one house. He has then only anticipated
the demand for labor, but by a somewhat less interval
than when houses are plenty. He can not at all increase
the wages-fund, taking one year with another, by his de-
cision between buying and building. He can, however,
benefit the situation of the laboring class by equalizing
in some slight degree the demand for labor, which he
could effect by building in depressed and by buying in
prosperous times. The contrary, however, is the usual
course of those desiring houses, as they are prone to buy
3
48 CAPITAL AND POPULATION.
in depressed and build in prosperous times, because they
find an individual profit in so doing.
The proposition that the demand for commodities is
not a demand for labor has therefore little or no signifi-
cance, but is merely a verbal distinction, utterly unworthy
of the prominence it has attained, and has no bearing in
any way or shape on the arguments here advanced, except
as such arguments afford the solution of the puzzle. If,
however, instead of a house or any other article of pro-
longed consumption possessed of exchangeable value, the
owner of the one thousand pounds employs labor to pro-
duce objects of no utility — as, for instance, if he employed
them in removing and then bringing back a pile of bricks
— he would benefit the laboring class at his own expense.
His expenditure would be purely of the nature of a gift
to his employes ; likewise, if he employs labor in personal
services the utility of which perishes in the doing, he
certainly adds to the wages-fund. But even then he
makes no permanent addition to it, nor does he when his
expenditure is of the nature of a gift, even when the
funds he expends come from dead stock, or from active
stock the product of which was destined by him to serve
as capital. If he restricts his own unproductive consump-
tion to obtain, in lieu of it, personal service, he disturbs
the normal ratio between capital and population ; as the
amount of capital remains the same, while the number
of laborers seeking employment is less by the number of
them employed by him. This results in a rise of propor-
tional wages and fall of profits, which leads to a decline
of productive consumption until the ratio is adjusted, and
there is for a time less employment for laborers than if
he had expended the one thousand pounds unproductively.
If his demand for services is permanent, population re-
INCREASE OF CAPITAL. 49
maining the same, there is a permanent decline in the
normal amount of capital, and the nation is permanently
poorer in accumulated wealth than it would have been if
his expenditure had been for unproductive consumption
of material things. This permanent loss will be to the
detriment, not of the rate but of the gross amount of
profits, and the wages-fund will be as large as, but no
larger than, before.
If the one thousand pounds be taken from capital or
from funds which would have been added to capital,
our supposed employer of labor in services would lessen
equally the amount of capital and the number of produc-
tive laborers, except to the degree in which he disturbed
the normal ratio of fixed to circulating capital ; i. e., labor
employed in personal services requiring no fixed capital
to speak of, the same amount of capital would employ
more labor than before, which would entail some slight
decline in profits, and the employment of labor. As be-
fore, the community at large will be able to retain some-
what less of capitalized wealth, while the wages-fund will
be unaffected.
Every diversion of labor from productive to unpro-
ductive employment necessarily decreases the number of
laborers productively engaged and the amount of capital
that can he utilized — and can not^ as Mill practically
claims^ at all increase the total number or remuneration
of laborers employed productively and unproductively.
If Mill is right in claiming that the demand for com-
modities is not a demand for labor, it would follow that the
greater the demand for services the better the condition
of the laborer should be. During feudal times this de-
mand was very much greater than it has ever since been,
but the rates of both proportional and real wages were
50 CAPITAL AND POPULATION.
then normally lower than at present, and no one will claim
that a return to feudal customs would now be of any
benefit to laborers, nor that it would not certainly lead
to an enormous decrease in capitalized wealth, and the
annual product of material things. The appeal to facts,
therefore, is decidedly against Mill's ingenious theory.
The w^orld can elect what proportion of its labor shall
be utilized productively, and what in services, but it can
not increase the amount of services and enjoy the same
amount of material products as before ; and this, when
analyzed, is what the proposition, that the demand for
commodities is not a demand for labor, really asserts.
Certain economists propose to include services under
the term " wealth." To this misuse of language I can not
agree ; not that I deny that services possess exchangeable
value, but because the distinction between material and
immaterial things is too radical. The latter can neither
be accumulated nor distributed, and the discovery of the
laws governing the accumulation and distribution of
material wealth is the chief object of the science. As
we have seen, services, although not themselves material
things, nevertheless aifect the production and accumula-
tion of material things, and possess as well both value
and utility. They come certainly under the cognizance
of the science, but as causes, not effects. They them-
selves stand in but little need of explanation, but aid in
explaining what does.
CHAPTER III.
THE TENDENCY OF CAPITAL TO OUTSTRIP POPULATION.
I HAVE now reached tlie more agreeable task of show-
ing that my views of the nature and limits of capital dif-
fer from those of Mill and Ricardo mainly in the manner
of statement, and are not essentially diverse. I do, in-
deed, object most strenuously to the way in which they
present the subject ; as I hold that it prevents in great
part the practical application of economic ideas, and leads
these great thinkers, as we shall see later on, to several
erroneous theoretical conclusions. I may be pardoned if
I quote somewhat more extensively than the argument
strictly calls for, on account of my personal anxiety to be
considered rather as supplementing than as supplanting
their contributions to the science.
To commence, then, with Mill, I will first quote from
Book I, chapter xi, section 3 :
"When a country has carried production as far as in the existing
state of knowledge it can be carried, with an amount of return cor-
responding to the average strength of the effective desire of accu-
mulation in that country, it has reached what is called the stationary
state — the state in which no further addition will be made to capi-
tal unless there takes place either some improvement in the arts of
production, or an increase in the strength of the desire to accumu-
late. In the stationary state, though capital does not on the whole
increase, some persons grow richer and others poorer. Those
whose degree of providence is below the usual standard, become im-
poverished, their capital perishes, and makes room for the savings
52 CAPITAL AND POPULATION.
of those whose effective desire of accumulation exceeds the average.
These hecome the natural purchasers of the land, manufactories, and
other instruments of production owned by their less provident coun-
trymen."
Also from Book lY, chapter iv, section 5 :
" I now say that the mere continuance of the present annual in-
crease of capital, if no circumstance occurred to counteract its effect,
would suflBce in a small number of years to reduce the rate of net
profit to one per cent.
" To fulfill the conditions of the hypothesis, we must suppose an
entire cessation of the exportation of capital for foreign investment.
No more capital sent abroad for railways or loans; no more emi-
grants taking capital with them to the colonies, or to other coun-
tries ; no fresh advances made, or credits given, by bankers or mer-
chants to their foreign correspondents. We must also assume that
there are no fresh loans for unproductive expenditure by the gov-
ernment, or on mortgage, or otherwise ; and none of the waste of
capital which now takes place by the failure of undertakings, which
people are tempted to engage in by the hope of a better income than
can be obtained in safe paths at the present habitually low rate of
profit. We must suppose the entire savings of the community to be
annually invested in really productive employment within the coun-
try itself; and no new channels opened by industrial inventions, or
by a more extensive substitution of the best-known processes for
inferior ones.
" Few persons would hesitate to say that there would be great
difficulty in finding remunerative employment every year for so
much new capital, and most would conclude that there would be
what used to be termed a general glut ; that commodities would be
produced, and remain unsold, or be sold only at a loss. But the full
examination which we have already given to this question has
shown that this is not the mode in which the inconvenience would
be experienced. The difficulty would not consist in any want of
market. If the new capital were duly shared with many varieties
of employment, it would raise up a demand for its own produce,
and there would be no cause why any part of that produce should
remain longer on hand than formerly. What would really be, not
TENDENCY OF CAPITAL TO OUTSTRIP POPULATION. 53
merely difficult, but impossible, would be to employ this capital
without submitting to a rapid deduction of the rate of profit.
"As capital increased, population either would also increase, or
it would not. If it did not, wages would rise, and a greater capital
would be distributed in wages among the same number of laborers.
There being no more labor than before, and no improvements to
render the labor more efficient, there would not be any increase of
the produce ; and as the capital, however largely increased, would
only obtain the same gross return, the whole savings of each year
would be exactly so much subtracted from the profits of the next
and of every following year. It is hardly necessary to say that in
some circumstances profits would very soon fall to the point at
which further increase of capital would cease. An augmentation
of capital, much more rapid than that of population, must soon
reach its extreme limit, unless accompanied by increased efficiency
of labor (through inventions and discoveries, or improved mental
and physical education), or unless some of the idle people, or of the
unproductive laborers, became productive."
And, again, from Book I, chapter xiii, section 1 :
*' But there are other countries, and England is at the head of
them, in which neither the spirit of industry nor the effective desire
of accumulation need any encouragement ; where the people will
toil hard for a small remuneration, and save much for a small profit ;
where, though the general thriftiness of the laboring class is much
below what is desirable, the spirit of accumulation in the more pros-
perous part of the community requires abatement rather than in-
crease. In these countries there would never be any deficiency of
capital, if its increase were never checked or brought to a stand by
too great a diminution of its returns."
And from Book lY, chapter v, section 1 :
"It must always have been seen, more or less distinctly, by
political economists, that the increase of wealth is not boundless ;
that at the end of what they term the progressive state lies the
stationary state ; that all progress in wealth is but a postponement
of this, and that each step in advance is an approach to it. We
have now teen led to recognize that this ultimate goal is at all times
54 CAPITAL AND POPULATIOK
near enough to he fully in mew ; that we are always on the verge
of it, and that, if we have not reached it long ago, it is because the
goal itself flies before us. The richest and most prosperous coun-
tries would very soon attain the stationary state, if no further im-
provements were made in the productive arts, and if there were a
suspension of the overflow of capital from those countries into the
uncultivated or ill-cultivated regions of the earth."
And from Book Y, chapter iv, section 4 :
" In England the great emigration of capital, and the almost
periodical occurrence of commercial crises through the speculations
occasioned by the habitually low rate of profit, are indications that
profit has attained the practical though not the ultimate minimum,
and that all the savings which take place (beyond what improve-
ments, tending to the cheapening of necessaries, make room for)
are either sent abroad for investment or periodically swept away."
To this I must object that no destruction of capital or
wealth in any form occurs during a panic. The excess
of capital is not " swej)t away " in any sense of the term.
It is not even devoted to unproductive consumption, as
that itself in such times is lessened. The readjustment
comes, and can only come, from a decrease in productive
consumption, greater than the accompanying decrease in
unproductive. If unproductive consumption did not de-
crease, the proper ratio of capital to population would be
obtained much sooner than it now is, viz., when produc-
tion had been decreased to an amount exactly equal to
the previous over-accumulation; and the only loss that
society would suffer would be what it would have lost
if the superabundant capital had been destroyed by fire,
or in any manner consumed without affording any enjoy-
ment or satisfaction. But the curtailment of unproduc-
tive consumption adds to this loss one of many times its
extent, viz., the loss for ever of all those enjoyments
TENDENCY OF CAPITAL TO OUTSTRIP POPULATION. 55
which individuals have foregone by lessening their un-
productive consumption, in their endeavor to retain their
own capital unimpaired ; or rather the loss of the produc-
tion which would have satisfied such unproductive con-
sumption. There is here a case where individual are
opposed to social interests. By retrenching expenditure
the individual adds to, or at least retains more of, his
capital ; but he does it at the expense of the capital of
his fellow-citizens. The capital that the community can
permanently employ, including his own, is actually less-
ened by his accretions when the general capital has in-
creased more rapidly than population.
Again, in Book I, chapter v, section 7 :
"This perpetual consumption and reproduction of capital affords
the explanation of what has so often excited wonder, the great ra-
pidity with which countries recover from a state of devastation;
the disappearance, in a short time, of all traces of the mischiefs done
by earthquakes, floods, hurricanes, and the ravages of war. An
enemy lays waste a country by fire and sword, and destroys or car-
ries away nearly all the movable wealth existing in it ; all the in-
habitants are ruined, and yet, in a few years after, everything is
much as it was before. This vis medicatrix naturm has been a sub-
ject of sterile astonishment, or has been cited to exemplify the won-
derful strength of the principle of saving, which can repair such
enormous losses in so brief an interval. There is nothing at all
wonderful in the matter. What the enemy have destroyed, would
have been destroyed in a little time by the inhabitants themselves;
the wealth which they so rapidly reproduce, would have needed to
be reproduced and would have been reproduced in any case, and
probably in as short a time. Nothing is changed, except that dur-
ing the reproduction they have not now the advantage of consum-
ing what had been produced previously. The possibility of a rapid
repair of their disasters mainly depends on whether the country has
deen depopulated. If its effective population have not been extir-
pated at the time^ and are not starved afterward^ then, with the
same skill and knowledge which they had before, with their land
66 CAPITAL AND POPULATION.
and its permanent improvements undestroyed, and the more durable
buildings probably unimpaired, or only partially injured, they have
nearly all the requisites for their former amount of production. If
there is as much of food left to them, or of valuables to buy food,
as enables them by any amount of privation to remain alive and in
working condition, they will in a short time have raised as great a
produce, and acquired collectively as great wealth and as great a
capital, as before, by the mere continuance of that ordinary amount
of exertion which they are accustomed to employ in their occupa-
tions. Nor does this evince any strength in the principle of saving,
in the popular sense of the term, since what takes place is not in-
tentional abstinence, but involuntary privation."
And, finally, Book lY, chapter iv, section 4 :
*'We now arrive at the fundamental proposition which this
chapter is intended to inculcate. When a country has long possessed
a large production, and a large net income to make savings from,
and when, therefore, the means have long existed of making a great
annual addition to capital (the country not having, like America, a
large reserve of fertile land still unused), it is one of the chief char-
acteristics of such a country, that the rate of profit is habitually
within, as it were, a hand's breadth of the minimum, and the country,
therefore, on the very verge of the stationary state. By this I do
not mean that this state is likely, in any of the great countries of
Europe, to be soon actually reached, or that capital does not still
yield a profit considerably greater than what is barely sulficient to
induce the people of those countries to save and accumulate."
I will also quote Hicardo in this connection, calling
attention to the fact that he here nses capital in Mill's
sense, and can not mean by it the wages-fund — although
most of his assertions are only true of the wages-fund —
as no increase of that beyond the increase of population
is conceivable.
Kicardo's works, chapter xxi, page 174 :
" No accumulation of capital will permanently lower profits, un-
less there be some permanent cause for the rise in wages. If the
TENDEI^CY OF CAPITAL TO OUTSTRIP POPULATION. 57
funds for the maintenance of labor were doubled, tripled, or quad-
rupled, there would not long be any difficulty in procuring the nec-
essary number of bauds 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 labor. If the necessaries of the workmen could
be constantly increased with the same facility, there could be no
permanent alteration in the rate of profit or wages, to whatever
amount capital might be accumulated. Adam Smith, however, uni-
formly ascribes the fall of profits to the accumulation of capital, to
the competition which will result from it, without ever adverting to
the increasing difficulty of providing food for the additional number
of laborers which the additional capital will employ. ' The increase
of stock,' he says, 'which raises wages tends to lower profits.'
Adam Smith speaks here of a rise of wages, but it is a temporary
rise proceeding from increased funds before the population is in-
creased, and he does not appear to see that, at the same time that
the capital is increased, the work to be effected by capital is in-
creased in the same proportion. M. Say has, however, most satis-
factorily shown that there is no amount of capital which may not
be employed in a country, because demand is only limited by produc-
tion. 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 con-
sumer of the goods of some other person.
" There can not then be accumulated in a country any amount of
capital which can not be employed productively until wages rise so
high in consequence of the rise of necessaries, and so little conse-
quently remains for the profits of stock, that the motive for accu-
mulation ceases.
" Whether these increased productions, and the consequent de-
mand 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 laborer ; I say for a limited period, because no point is better
established than that the supply of laborers will always ultimately
be in proportion to the means of supporting them.
58 CAPITAL AND POPULATION.
*' There is only one case, and that will be temporary, in which
the accumulation of capital, with a low price of food, may be at-
tended with a fall of profits, and that is, when the funds for the
maintenance of labor increase ranch more rapidly than population ;
wages will then he high, and profits low. If every man were to fore-
go the use of luxuries and he intent only on accumulation, a quantity
of necessaries might he produced for which there could not he any
immediate consumption. Of commodities so limited in number there
might undoubtedly he a universal glut, and consequently there
might neither be demand for an additional quantity of such commod-
ities 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."
Without any separate criticism of these quotations, I
am justified in asserting that, with much from which I
dissent, they contain or imply every one of my premises
and deductions, except that of the influence of increase
of capital upon population. That the conclusions of
Ricardo and Mill differ from mine, is owing solely to
their ambiguous use of the term " capital." Every one
of the principles I have advocated, with the above excep-
tion, they enunciate distinctly, except that they usually,
but not always, assume that capital, in Mill's sense, and
the wages-fund, i. e., capital, in Ricardo's sense, vary
together ; whereas I hold that they vary inversely, other
things, of course, remaining the same. In this assertion
there can be no doubt that I am right and they wrong ;
and it is readily seen that they fell into their error from
not fully perceiving all the implications of their own defi-
nitions of capital, and through, taking it for granted that
what was true of it in one tense was true of it in all, and
from the misleading supposition that a low rate of profit
was a stimulus to population.
But I differ from them in a matter I have not yet
TENDEJTCY OF CAPITAL TO OUTSTRIP POPULATION. 59
touclied upon, except by implication, viz., in my views
as to what constitutes the progressive, stationary, and
retrogressive states of society ; and the difference is im-
portant, as the soundness of my position here will affect
the truth of deductions to be made later on, the practical
application of which will profoundly influence the eco-
nomic policy w^hich nations should adopt to secure for
themselves the greatest possible share of the world's
products, and to increase to the highest point their own
productive efficiency.
The circumstance that seems to me important is the
determination of the question whether the net produce
of a nation bears an increasing, a decreasing, or a steady
ratio to its population. If the income ^^r capita of its
people is growing larger, I should say it was enjoying an
economic progress ; if smaller, that it was going backward,
irrespective of whether such advance or retrogression was
accompanied by a growth or decline of the total wealth
and population.* It is, indeed, true that any increase
in net income per capita is usually accompanied by an
increase in the aggregate of accumulation and of popula-
tion ; but the latter must be distinguished from the for-
mer as being its effect and counteractant. It is its effect,
because any increase in net income is an additional stimu-
lus to population ; and its counteractant, because every in-
crease of numbers lowers the margin of cultivation, and
because every increase of capital beyond that of popula-
tion decreases the capacity of the nation to produce by
lessening the number of laborers employed : but there is
no necessary connection between increase of net income
* In net income I would include the income of immediate satisfactions
and enjoyments derived from commodities reserved for prolonged unpro-
ductive consumption, as well as of those derived from services.
60 CAPITAL AND POPULATION".
and population, or between a large annual production and
accumulation. When people understand and fully ap-
preciate the working of economic laws, they will endeavor
to dissociate them, and there is no reason why they should
be unsuccessful in such efforts. When this is effected,
advantages gained in productive efficiency will not be
wasted in a mere increase of numbers, or be frittered
away and made barren of enjoyment by the attempt
to possess more capitalized wealth than economic law
allows.
Strictly speaking, there is no stationary state of so-
ciety at all. The perpetual flux and reflux of human
events prevent such a state from being more than mo-
mentary, a mere turning-point between the progressive
and the retrogressive, or vice versa. When the growth
in net incomes, in which I consider the progressive state
to consist, is counteracted by the growth of aggregate
capital and population, which Mill seems to consider as
constituting it, society pauses stationary for a moment,
and then enters the retrogressive state, in which its annual
produce and net income decline, and this proceeds until
the consequent decrease of capital and population checks
society in its dow^nward course, and it again momentarily
pauses, in a second and lower stationary state, from which
an advance is once more effected. If, on the whole, a na-
tion progresses in wealth, population, and the average in-
come of its inhabitants (without this last ingredient, I
refuse to accept it as progress at all), it is not, as Mill
seems to suppose, because it has never entered the station-
ary or retrogressive states, but because its passage through
the progressive state has been longer, and has more influ-
enced its economic condition, than its passage through
the others. The progress of society is due, not to ground
TENDENCY OF CAPITAL TO OUTSTRIP POPULATION. 61
never being lost, but to the fact that, while much is re-
peatedly lost, more has been gained: like the incoming
tide, each wave has reached a higher level than its
predecessor.
Mill, and Ricardo with him, seems to have considered
the stationary state of society as never practically reached,
and to have thought it somewhat problematical that it
ever would be. They w^ould both freely admit the con-
clusions I have drawn, as well as those to be hereafter
deduced, as applicable to such a social condition, and,
when induced to admit that all civilized nations complete
the round of the three states in constantly recumng
periods of about ten years, they could not but regard the
validity of my conclusions as established. The possibil-
ity of capital pressing upon population is clearly recog-
nized by them. If they had recognized that this press-
ure is not only an abstract possibility, but an actually
existent economic fact, and that the pressure of capital
upon population is as constant and steady as that of pop-
ulation upon the food-supply, they could not have failed
to draw as important conclusions from the principle they
neglected, as being merely theoretical, as they did draw
from the theory of Malthus.
That the tendency of capital to increase faster than
population is steady and constant, whenever and wher-
ever men in their economic actions are undisturbed by
abnormal events, is the central thouglit of this treatise,
and is the contribution I bring to the science of political
economy.
I do not mean by this that capital constantly increases
more rapidly than population, any more than Malthus
meant that population always increased faster than its
food-supply. The increase of capital and of population
62 CAPITAL AN"D POPULATIOK.
both have their checks, which operate in very similar
manner.
Profits are the means of support to capital, as truly
and very much in the same sense as food is the means of
support to population. The checks upon both capital and
population operate in the same manner, and not only
often forbid further increase, but sometimes demand an
actual decrease. It is not the increase of either popula-
tion or capital that is constant, but the tendency to such
increase heyond their economic limits.
I must not be understood as asserting that all human
societies show this tendency in a periodical increase of
capital beyond the needs of population. Whenever and
wherever capital is physically insufficient to furnish the
amount of wages-fund that can be profitably employed,
the limitations to capital are removed as long as such
condition lasts. In one sense all barbarous, semi-civilized,
and despotic countries, where there is but scanty security
for life and property, can be said to be in this condition,
and the checks to accumulation in them are moral and
social, and not economic. What I mean is, that in the
absence of war, famine, and bad government, capital will
constantly tend to outstrip population, will periodically
succeed in so doing, and will be in excess, to the detriment
of production for a greater or less portion of the time.
The analogy between the pressure it exerts and that ex-
erted by population on the margin of cultivation is as
perfect as it is the nature of any analogy to be. Even
taking Mill's definition of what constitutes the stationary
state, viz., the decline of the rate of profit to the minimum
and the cessation of accumulation, what is more evident
than that such decline is the most important occurrence
in every period of industrial stagnation, and that not only
TENDENCY OF CAPITAL TO OUTSTEIP POPULATION 63
in such times is the stationary state as defined by him
reached, but that the rate of profit then declines below
the minimum and carries the community for a time into
the retrogressive state in which a decrease of production
takes place ? That the state of civilized communities is
still on the average progressive, is certainly no proof that
the other states are not occasionally reached. A perma-
nent stationary or retrogressive state can not occur until
all the fertile land of the globe is reclaimed, and then
only in the absence of further improvements and inven-
tions, and of a decrease of population, except, indeed, pop-
ulation increases as fast as, or faster than, the reclamation
of fertile land. The condition of mankind in the station-
ary and retrogressive states, instead, however, of being a
curious problem, the solution of which has a practical in-
terest for future generations alone, is a topic of pressing
importance.
CHAPTEE ly.
FIXED CAPITAL.
" There is a great difference between the effects of circulating
and those of fixed capital, on the amount of the gross produce of
the country. Circulating capital being destroyed as such, br at any
rate finally lost to the owner, by a single use, and the product re-
sulting from that one use being the only source from which the
owner can replace the capital, or obtain any remuneration for its
productive employment, the product must of course be sufficient
for those purposes ; or, in other words, the result of a single use
must be a reproduction equal to the whole amount of the circulating
capital used, and a profit besides. This, however, is by no means
necessary in the case of fixed capital. Since machinery, for exam-
ple, is not wholly consumed by one use, it is not necessary that it
should be wholly replaced from the product of that use. The ma-
chine answers the purpose of its owner, if it brings in, during each
interval of time, enough to cover the expense of repairs, and the
deterioration in value which the machine has sustained during the
same time, with a surplus sufficient to yield the ordinary profit on
the entire value of the machine.
" From this it follows that all increase of fixed capital^ when
talcing place at the expense of circulating^ must he at least tempora-
rily prejudicial to the interests of the laborers. This is true, not of
machinery alone, but of all improvements by which capital is sunk ;
that is, rendered permanently incapable of being applied to the
maintenance and remuneration of labor. Suppose that a person
farms his own land, with a capital of two thousand quarters of
corn, employed in maintaining laborers during one year (for sim-
plicity we omit the consideration of seed and tools), whose labor
FIXED CAPITAL. 65
produces him annually two thousand four hundred quarters, being
a profit of twenty per cent. This profit we shall suppose that he
annually consumes, carrying on his operations from year to year on
the original capital of two thousand quarters. Let us now suppose
that, by the expenditure of half his capital, he effects a permanent
improvement of his land, which is executed by half his laborers,
and occupies them for a year, after which he will only require, for
the effectual cultivation of his land, half as many laborers as before.
The remainder of his capital he employs as usual. In the first year
there is no difference in the condition of the laborers, except that
part of them have received the same pay for an operation on the
land which they previously obtained for plowing, sowing, and reap-
ing. At the end of the year, however, the improver has not, as
before, a capital of two thousand quarters of corn. Only one thou-
sand quarters of his capital have been reproduced in the usual way:
he has now only those thousand quarters and his improvements.
He will employ, in the next and in each following year, only half
the number of laborers, and will divide among them only half the
former quantity of subsistence. The loss will soon be made up to
them if the improved land, with the diminished quantitj' of labor,
produces two thousand four hundred quarters as before, because so
enormous an accession of gain will probably induce the improver to
save a part, add it to his capital, and become a larger employer of
labor. But it is conceivable that this may not be the case; for
(supposing, as we may do, that the improvement will last indefi-
nitely, without any outlay worth mentioning to keep it up) the
improver will have gained largely by his improvement if the land
now yields, not two thousand four hundred, but one thousand five
hundred quarters ; since this will replace the one thousand quarters
forming his present circulating capital, with a profit of twenty-five
per cent (instead of twenty as before) on the whole capital, fixed
and circulating together. The improvement, therefore, may be a
very profitable one to him, and yet very injurious to the laborers.
" The supposition, in the terms in which it has been stated, is
purely ideal ; or at most applicable only to such a case as that of
the conversion of arable land into pasture, which, though formerly
a frequent practice, is regarded by modern agriculturists as the re-
verse of an improvement. The clearing away of the small farmers
in the north of Scotland, within the present century, was, however,
QQ CAPITAL AND POPULATION".
a case of it ; and Ireland, since tlie potato famine and the repeal
of the corn-laws, is another. The remarkable decrease which has
lately attracted notice in the gross produce of Irish agriculture is,
to all appearance, partly attributable to the diversion of land from
maintaining human laborers to feeding cattle ; and it could not have
taken place without the removal of a large part of the Irish popula-
tion by emigration or death. We have thus two recent instances in
which what was regarded as an agricultural improvement has dimin-
ished the power of the country to support its population. The effect,
however, of aU the improvements due to modern science is to
increase, or, at all events, not to diminish, the gross produce. But
this does not affect the substance of the argument. Suppose that
the improvement does not operate in the manner supposed — does
not enable a part of the labor previously employed on the land to be
dispensed with — but only enables the same labor to raise a greater
produce. Suppose, too, that the greater produce, which by means
of the improvement can be raised from the soil with the same labor,
is aU wanted, and will find purchasers. The improver will in that
case require the same number of laborers as before, at the same
wages. But where will he find the means of paying them ? He
has no longer his original capital of two thousand quarters dispos-
able for the purpose. One thousand of them are lost and gone —
consumed in making the improvement. If he is to employ as many
laborers as before, and pay them as highly, he must borrow, or ob-
tain from some other source, a thousand quarters to supply the
deficit. But these thousand quarters already maintained, or were
destined to maintain, an equivalent quantity of labor. They are
not a fresh creation ; their destination is only changed from one
productive employment to another ; and, though the agriculturist
has made up the deficiency in his own circulating capital, the breach
in the circulating capital of the community remains unrepaired." —
(Mill, Book I, chapter vi, section 2.)
The necessity whicli the English school of economists
labor under, of making it appear that industrial inactiv-
ity is due to the scarcity of material wealth, or rather of
circulating capital, has led them to assert that the increase
of fixed capital often causes the decrease of the wages-
FIXED CAPITAL. 67
fund. They generally express themselves somewhat dif-
ferently, and substitute the words " circulating capital "
for wages-fund; as, in the above passage, Mill says:
" From this it follows that all increase of fixed capital,
when taking place at the expense of circulating, must
be, at least temporarily, prejudicial to the interests of
the laborers." The passage is not true, unless circulating
capital is understood as the wages-fund alone. It some-
times happens that the increase of fixed capital is at the
expense of the wages-fund, and Mill gives two instances
where this has occurred ; but it is evident that such de-
pletion of the wages-fund can not occur until the other
part of circulating capital — dead stock — is first converted
into fixed capital. But Mill evidently intends to convey
the idea that all increase of fixed, at the expense of circu-
lating capital (as defined by himself), is prejudicial to the
laborers. On the contrary, it is evident that any deple-
tion of dead stock by its conversion into fixed capital raises
the rate of profit on active circulating stock, and leads to
a further depletion of dead stock by the conversion of
more of it into the wages-fund than would otherwise go
there. The demand for labor resulting from the conver-
sion of dead stock into fixed capital can not raise real,
though it may money, wages, because while it is taking
place the decrease of dead stock will cause the things in
which wages are really paid to rise in money-value more
than money- wages can by any possibility advance. What
finally causes a rise in wages and a decline in the money-
value of dead stock is, the demand for labor caused by
the attempt to utilize such fixed capital ; and such rise of
wages and fall in the value, as compared with wages, of
dead stock, can only occur when the labor at first applied
to the creation of fixed capital is employed in utilizing it
68 CAPITAL AND POPULATION.
in production, and has caused an increase of dead stoch to
such degree as to more than make ujp its depletion hy fixed
capital.
Over-investment, even when it is so great as to use up
all the dead and part of the active stock besides, puts off
the time when labor can not be profitably employed. Its
action is that of an anticipated demand for labor, and its
evil effects are not felt until the period of recuperation ;
then the demand that has been anticipated can not be
exerted. The idle factories and workshops stand ready
to be utilized the moment there is a profit in using them ;
and no more will be erected until their number becomes
insufficient for the demands of industry. If, in times of
stagnation, all superfluous fixed capital and dead stock
were incontinently destroyed, it would lead to an almost
immediate resumption of industrial activity. If this were
habitually done, it would be greatly to the advantage of
the laborers, as it would result in a permanent increase of
the average amount of the wages-fund, l^or would it be
at all to the disadvantage of capitalists as a class ; on the
contrary, they would gain by it, though not to the extent
of the laborers. The real destruction of such property oc-
curs when funds that should have gone to unproductive
consumption were diverted to fixed capital, or retained as
dead stock. Once suffered, the loss is irreparable ; but a
further loss is entailed to both labor and capital by the
continuance in existence of such property, prohibiting
future production often to many times its own amount.
I am not advocating any destruction of unprofitable stock ;
that would certainly be impracticable without entailing
great injustice to individuals ; but I am pleading against
its creation. Such arbitrary destruction of superabun-
dant capital does sometimes occur in the natural course
FIXED CAPITAL. 69
of human events, and is always followed by a season of
great industrial activity. This explains the rapid recov-
ary of nations from the effects of the most devastating
wars, and their prosperity during their continuance, al-
though the destruction of human life and the drain of
laborers to the army largely counteract the effects of the
depletion of capital. Witness the wonderful recovery of
France from the terrible losses and enormous indemnity
imposed upon her by Germany. Germany brought home
with her milliards her own industrial ruin, and has un-
dergone a loss in productive power many times greater
than the sum she filched from her neighbor, while France
is wealthier to-day than before the enormous tribute was
exacted.
It is incorrect, therefore, to attribute the origin of our
depressions to over-investment. What that really effects
is, to defer their occurrence, and to prolong them when
finally they do occur.
That Mill's views really coincide with mine, as ex-
pressed in this chapter, I also claim, and submit the fol-
lowing extracts to prove the assertion, and shall leave
them without further comment than the intelligent read-
er can supply for himself from what has been said, and
will only ask that Mill's ambiguous use of the term " cap-
ital " shall be constantly borne in mind :
" The theory of the effect of accumulation on profits laid down
in the preceding chapter, materially alters many of the practical
conclusions which might otherwise be supposed to follow from the
general principles of political economy, and which were, indeed,
long admitted as true by the highest authorities on the subject.
*' It must greatly abate, or rather, altogether destroy, in coun-
tries where profits are low, the immense importance which used to
be attached by political economists to the effects which an event or
a measure of government might have in adding to, or subtracting
70 CAPITAL AND POPULATION.
from, tlie capital of tlie country. "We have now seen that the low-
ness of profits is a proof that the spirit of accumulation is so active,
and that the increase of capital has proceeded at so rapid a rate, as
to outstrip the two counter-agencies, improvements in production,
and increased supply of cheap necessaries from abroad : and that
unless a considerable portion of the annual increase of capital were
either periodically destroyed, or exported for foreign investment,
the country would speedily attain the point at which further accu-
mulation would cease ; or, at least, spontaneously slacken so as no
longer to overpass the march of invention in the arts which pro-
duce the necessaries of life. In such a state of things as this, a
sudden addition to the capital of the country, unaccompanied by
any increase of productive power, would be but of transitory du-
ration ; since by depressing profits and interest, it would either
diminish by a corresponding amount the savings which would be
made from income in the year or two following, or it would cause
an equivalent amount to be sent abroad, or to be wasted in rash
speculations. Neither, on the other hand, would a sudden abstrac-
tion of capital, unless of inordinate amount, have any real effect in
impoverishing the country. After a few months or years, there
would exist in the country just as much capital as if none had been
taken away. The abstraction, by raising profits and interest, would
give a fresh stimulus to the accumulative principle, which would
speedily fill up the vacuum. Probably, indeed, the only effect that
would ensue, would be that for some time afterward less capital
would be exported, and less thrown away in hazardous speculation.
"In the first place, then, this view of things greatly weakens, in
a wealthy and industrious country, the force of the economical argu-
ment against the expenditure of public money for really valuable,
even though industriously unproductive, purposes. If for any great
object of justice or philanthropic policy, such as the industrial re-
generation of Ireland, or a comprehensive measure of colonization
or of public education, it were proposed to raise a large sum by way
of loan, politicians need not demur to the abstraction of so much
capital as tending to dry up the permanent sources of the country's
wealth, and diminish the fund which supplies the subsistence of the
laboring population. The utmost expense which could be requisite
for any of these purposes would not, in all probability, deprive one
laborer of employment, or diminish the next year's production by
FIXED CAPITAL. 71
one ell of cloth or one bushel of grain. In poor countries, the cap-
ital of the country requires the legislator's sedulous care; he is
bound to be most cautious of encroaching upon it, and should favor
to the utmost its accumulation at home, and its introduction from
abroad. But in rich, populous, and highly cultivated countries, it is
not capital which is the deficient element, but fertile land ; and what
the legislator should desire and promote, is not a greater aggregate
saving, but a greater return to savings, either by improved cultiva-
tion, or by access to the produce of more fertile lands in other parts
of the globe. In such countries, the government may take any
moderate portion of the capital of the country and expend it as
revenue, without affecting the national weath, the whole being
either drawn from that portion of the annual savings which would
otherwise be sent abroad, or being subtracted from the uni)roduc-
tive expenditure of individuals for the next year or two, since every
million spent makes room for another million to be saved before
reaching the overflowing point. When the object in view is worth
the sacrifice of such an amount of the expenditure that furnishes
the daily enjoyments of the people, the only well-grounded econom-
ical objection against taking the necessary funds directly from cap-
ital, consists of the inconveniences attending the process of raising
a revenue by taxation, to pay the interest of a debt.
" The same considerations enable us to throw aside as unworthy
of regard one of the common arguments against emigration as a
means of relief for the laboring class. Emigration, it is said, can
do no good to the laborers, if, in order to defray the cost, as much
must be taken away from the capital of the country as from its
population. That anything like this proportion could require to be
abstracted from capital for the purpose even of the most extensive
colonization, few, I should think, would now assert ; but, even on that
untenable supposition, it is an error to suppose that no benefit would
be conferred on the laboring class. If one tenth of the laboring
people of England were transferred to the colonies, and along with
them one tenth of the circulating capital of the country, either
wages or profits, or both, would be greatly benefited, by the dimin-
ished pressure of capital and population upon the fertility of the
land. There would be a reduced demand for food ; the inferior
arable lands would be thrown out of cultivation, and would become
pasture ; the superior would be cultivated less highly, but with a
4
72 CAPITAL AND POPULATION.
greater proportional return ; food would be lowered in price, and,
tliough money- wages would not rise, every laborer would be con-
siderably improved in circumstances — an improvement which, if no
increased stimulus to population and fall of wages ensued, would be
permanent ; while, if there did, profits would rise, and accumula-
tion start forward so as to repair the loss of capital. The landlords
alone would sustain some loss of income ; and even they, only if
colonization went to the length of actually diminishing capital and
population, but not if it merely carried off the annual increase.
"From the same principles we are now able to arrive at a final
conclusion respecting the effects which machinery, and generally the
sinking of capital for a productive purpose, produce upon the im-
mediate and ultimate interests of the laboring class. The charac-
teristic property of this class of industrial improvements is the con-
version of circulating capital into fixed ; and it was shown, in the
first book, that, in a country where capital accumulates slowly, the
introduction of machinery, permanent improvements of land, and
the like, might be, for the time, extremely injurious ; since the capi-
tal so employed might be directly taken from the wages-fund, the
subsistence of the people and the employment for labor curtailed,
and the gross annual produce of the country actually diminished.
But, in a country of great annual savings and low profits, no such
effects need be apprehended. Since even the emigration of capital,
or its unproductive expenditure, or its absolute waste, do not in
such a country, if confined within any moderate bounds, at all di-
minish the aggregate amount of the wages-fund, still less can the
mere conversion of a like sum into fixed capital, which continues to
be productive, have that effect. It merely draws off at one orifice
what was already flowing out at another ; or, if not, the greater va-
cant space left in the reservoir does but cause a greater quantity to
flow in. Accordingly, in spite of the mischievous derangements of
the money-market which have been occasioned by the sinking of
great sums in railways, I was never able to agree with those who
apprehended mischief from this source to the productive resources
of the country. Not on the absurd ground (which to any one ac-
quainted with the elements of the subject needs no confutation) that
railway expenditure is a mere transfer of capital from hand to hand,
by which nothing is lost or destroyed. This is true of what is spent
in the purchase of the land ; a portion, too, of what is paid to par-
FIXED CAPITAL. 73
liamentary agents, counsel, engineers, and surveyors, is saved by
those who receive it, and becomes capital again ; but v<rhat is laid
out in the hona fide construction of the railway itself is lost and
gone ; when once expended, it is incapable of ever being paid in
wages or applied to the maintenance of laborers again ; as a matter
of account, the result is that so much food and clothing and tools
have been consumed, and the country has got a railway instead.
But what I would urge is, that sums so applied are mostly a mere
appropriation of the annual overflowing which would otherwise
have gone abroad, or been thrown away unprofitably, leaving neither
a railway nor any other tangible result. The railway gambling of
1844 and 1845 probably saved the country from a depression of
profits and interest, and a rise of all public and private securities,
which would have engendered still wilder speculations, and, when
the effects came afterward to be complicated by the scarcity of food,
would have ended in a still more formidable crisis than was experi-
enced in the years immediately following. In the poorer countries
of Europe, the rage for railway construction might have had worse
consequences than in England, were it not that in those countries
such enterprises are in a great measure carried on by foreign capi-
tal. The railway operations of the various nations of the world
may be looked upon as a sort of competition for the overflowing
capital of the countries where profit is low and capital abundant, as
England and Holland. The English railway speculations are a
straggle to keep our annual increase of capital at home ; those of
foreign countries are an effort to obtain it.*
"It already appears from these considerations that the conver-
sion of circulating capital into fixed, whether by railways, or manu-
factories, or ships, or machinery, or canals, or mines, or works of
drainage and irrigation, is not likely, in any rich country, to di-
minish the gross produce or the amount of employment for labor.
How much, then, is the case strengthened, when we consider that
these transformations of capital are of the nature of improvements
in production, which, instead of ultimately diminishing circulating
* It is hardly needful to point out how fully the remarks in the text
have been verified by subsequent facts. The capital of the country, far
from having been in any degree impaired by the large amount sunk in rail-
way construction, was soon again overflowing.
U CAPITAL AND POPULATION.
capital, are the necessary conditions of its increase ; since they alone
enable a country to possess a constantly augmenting capital, with-
out reducing profits to the rate which would cause accumulation to
stop ! There is barely any increase of fixed capital which does not
enable the country to contain eventually a larger circulating capital
than it otherwise could possess and employ within its own limits ;
for there is hardly any creation of fixed capital which, when it
proves successful, does not cheapen the articles on which wages are
habitually expended.
"Nevertheless, I do not believe that, as things are actually trans-
acted, improvements in production are often, if ever, injurious, even
temporarily, to the laboring classes in the aggregate. They would
be so if they took place suddenly to a great amount, because much
of the capital sunk must necessarily in that case be provided from
funds already employed as circulating capital. But improvements
are always introduced very gradually, and are seldom or never
made by withdrawing circulating capital from actual production,
but are made by the employment of the annual increase. There are
few, if any ^ examples of a great increase of fixed capital^ at a time
and place where circulating capital was not rapidly increasing like-
wise. It is not in poor or backward countries that great and costly
improvements in production are made. To sink capital in land for
a permanent return, to introduce expensive machinery, are acts
involving immediate sacrifice for distant objects, and indicate, in
the first place, tolerably complete security of property; in the sec-
ond, considerable activity of industrial enterprise ; and, in the third,
a high standard of what has been called the ' effective desire of ac-
cumulation ' — which three things are the elements of a society rap-
idly progressive in its amount of capital. Although, therefore, the
laboring classes must suffer, not only if the increase of fixed capital
takes place at the expense of circulating, but even if it is so large
and rapid as to retard that ordinary increase to which the growth
of population has habitually adapted itself; yet, in point of fact,
this is very unlikely to happen, since there is probably no country
whose fixed capital increases in a ratio more than proportional to
its circulating. If the whole of the railways which, during the spec-
ulative madness of 1845, obtained the sanction of Parliament, had
been constructed in the times fixed for the completion of each, this
improbable contingency would, most likely, have been realized;
FIXED CAPITAL. 75
but this very case has afforded a striking example of the difficulties
which oppose the diversion into new channels of any considerable
portion of the capital that supplies the old ; difficulties generally
much more than sufficient to prevent enterprises that involve the
sinking of capital from extending themselves with such rapidity as
to Impair the sources of the existing employment for labor.
" To these considerations must be added that, even if improve-
ments did for a time decrease the aggregate produce and the circu-
lating capital of the community, they would not the less tend, in
the long run, to augment both. They increase the return to capital ;
and of this increase the benefit must necessarily accrue either to the
capitalist in greater profits, or to the customer in diminished prices ;
affording in either case an augmented fund from which accumula-
tion may be made, while enlarged profits also hold out an increased
inducement to accumulation." — (MiU, Book IV, chapter v, sections
1 and 3.)
One criticism is perhaps advisable on tlie last quota-
tion. Mill says, " There are few, if any, examples of a
great increase of fixed capital at a time and place where
circulating capital was not rapidly increasing likewise."
As he defines capital, this is hardly true : using the word
according to Ricardo, it is true, because, as I have shown,
the transfer of dead circulating capital to the fixed form
is the cause of an additional amount of dead circulating
capital being also transferred to the fund of active circu-
lating capital, and that it is true in this sense is an impor-
tant verification of the principles here advanced.
The immediate effect of the creation of fixed capital
in sustaining profits by its depletion of dead stock might
seem to be partially counteracted by its withdrawing
laborers from the production of circulating stock. The
greater competition for labor resulting, undoubtedly tends
to raise proportional wages, and would do so were it not
that the demand for productive and unproductive con-
sumption remaining the same while the supply of com-
76 CAPITAL AND POPULATION
modities to be consumed being, by the supposition, de-
creased, the relative value of labor is lowered as compared
with other commodities, fixed capital excepted.
The case is the same when previously unemployed
labor is used in the creation of fixed capital ; this necessi-
tates an increase in the demand for productive and unpro-
ductive consumption together, while there is no increase
in the supply of commodities to be consumed. This can
only result in a fall in proportional wages and increase of
the rate of profit. This is what always occurs during the
periods when fixed capital is being created, as, even when
it diverts labor from other production, other production
utilizes the unemployed labor of the community. As
the process, however, causes a constant decline in the
relative value of fixed capital, such periods of inflated
prosperity and activity are soon brought to an end by the
creation of fixed property ceasing to be profitable.
CHAPTEE Y.
PANICS.
That the current explanations of panics are not very
satisfactory, will be conceded by most students of our
science. We have seen already that a conclusive test
exists, and can be applied, to disprove the most common
and popular one advanced, viz., that they are due to the
depletion of capital resulting from the waste and extrava-
gance of the prosperous times that precede them. The
popular apprehension of the subject is that they are
mainly due to this cause, and the mass of their readers
peruse with approval the diatribes of our newspaper
economists, denouncing expenditure both public and
private. Such readers are very sure that, individually,
they increase their incomes through saving, and lessen
them through spending ; and it is naturally hard for
them to understand why the same is not true of them-
selves collectively.
Economists, however, being somewhat more given to
verifying theory by fact, have, to a very considerable
extent, recognized that the seasons of " waste and ex-
travagance," being also those of great productive effi-
ciency, are, despite the large expenditure, the seasons in
which alone the community saves and adds to its wealth.
Accepting the authority of Mill and Eicardo, that in-
78 CAPITAL A'ND POPULATIOK
crease of wealth must lead to an increase of the wages-
fund and of production, they recognize the discrepancy
of theory and fact, and attempt to account for it mainly
by an endeavor to explain away the fact. They say that
it is not wealth, but only a part of wealth, that employs
labor, and that the decrease of employment is due to the
depletion of such part (circulating capital) by a diversion
of the funds, that should have flowed into it, to permanent
investment (fixed capital). But we have already seen that
this explanation is the reverse of true, as not the whole
of circulating capital, but only a part of it, employs labor,
and that such part is not only relatively but absolutely
the smaller, population remaining the same, when circu-
lating capital in gross is the greatest ; and we have also
seen that the creation of fixed capital, by decreasing dead
stock, always tends to a corresponding increase of the
active stock of circulating capital, or of the wages-fund.
It must, therefore, be acknowledged that, on the occur-
rence of a crisis, the funds physically availaMe for the
employment of labor, and the material wealth of the com-
munity in every form, are greater than at other times.
Mill himself is wiser than his followers. Confused
though he was by his ambiguous use of the term " capital,"
he nevertheless perceived that accumulations were great-
est just before a crisis, but, deceived by his erroneous
use of the term " market," he was unwilling to acknowl-
edge, in apparent contradiction to Say, that accumulation
tended to prevent exchanges ; and he attempts to explain
crises as referable solely to the action of the credit sys-
tem. In Book III, chapter xiv, section 4, he says :
" But it is a great error to suppose, with Sismondi, that a com-
mercial crisis is the effect of a general excess of production." (It
is excess of accumulation, not of production, contended against in
PAOTOS. Y9
this treatise, and practically contended for by Mill.) "It is simply
the consequence of an excess of speculative purchases. It is not a
gradual advent of low prices, but a sudden recoil from prices ex-
travagantly high. Its immediate cause is a contraction of credit,
and the remedy is not a diminution of supply^ but the restoration
of confidence."
Nothing could be more unequivocal than this, and
nothing could be more in contradiction to it than the
following passage in Book lY, chapter iv, sections 5
and 6:
" What, then, are these counteracting circumstances, which, in
the existing state of things, maintain a tolerably equal struggle
against the downward tendency of profits, and prevent the great
annual savings which take place in this country from depressing
the rate of profit much nearer to that lowest point to which it is
always tending, and which, left to itself, it would so promptly at-
tain ? The resisting agencies are of several kinds.
" First among them we may notice one which is so simple and
so conspicuous that some political economists, especially M. de
Sismondi and Dr. Chalmers, have attended to it almost to the
exclusion of all others. This is, the waste of capital in periods of
overtrading and rash speculation, and in the commercial revulsions
by which such times are always followed. It is true that a great
part of what is lost at such periods is not destroyed, but merely
transferred, like a gambler's losses, to more successful speculators.
But even of these mere transfers a large portion is always to
foreigners, by the hasty purchase of unusual quantities of foreign
goods at advanced prices. And much also is absolutely wasted.
Mines are opened, railways or bridges made, and many other works
of uncertain profit commenced, and in these enterprises much capi-
tal is sunk which yields either no return, or none adequate to the
outlay. Factories are built and machinery erected beyond what
the market requires, or can keep in employment. Even if they are
kept in employment, the capital is no less sunk ; it has been con-
verted from circulating into fixed capital, and has ceased to have
any influence on wages or profits." (We have seen that Mill is
mistaken in assuming that the amount of fixed capital has no influ-
80 CAPITAL AKD POPULATIOK
ence on wages.) " Besides this, there is a great unprodtcctiDe con-
sumption of capital, during the stagnation which follows a period of
general overtrading. JEstadlishments are shut up, or Tcept worTcing
without any profit, hands are discharged, and numbers of persons in
all ranlcs, being deprived of their income, and thrown for support on
their savings, find themselves, after the crisis has passed away, in
a condition of more or less impoverishment. Such are the effects of
a commercial revulsion : and that such revulsions are almost peri-
odical is a consequence of the 'very tendency of profits which we are
considering. By the time a few years have passed over without a
crisis, so much additional capital has been accumulated that it is no
longer possible to invest it at the accustomed profit : all public secu-
rities rise to a high price, the rate of interest on the best mercan-
tile security falls very low, and the complaint is general among
persons in business that no money is to be made. Does not this
demonstrate how speedily profit would be at the minimum, and the
stationary condition of capital would be attained, if these accumu-
lations went on without any counteracting principle? But the
diminished scale of all safe gains inclines persons to give a ready
ear to any projects which hold out, though at the risk of loss, the
hope of a higher rate of profit ; and speculations ensue, which, with
the subsequent revulsions, destroy or transfer to foreigners a con-
siderable amount of capital, produce a temporary rise of interest
and profit, make room for fresh accumulations, and the same round
is recommenced.
" This, doubtless, is one considerable cause which arrests profits
in their descent to the minimum, by sweeping away, from time to
time, a part of the accumulated mass by which they are forced
down. But this is not, as might be inferred from the language of
some writers, the principal cause. If it were, the capital of the
country would not increase ; but in England it does increase greatly
and rapidly. This is shown by the increasing productiveness of
almost all taxes, by the continual growth of all the signs of national
wealth, and by the rapid increase of population, while the condi-
tion of the laborers is certainly not declining, but, on the whole,
improving. These things prove that each commercial revulsion,
however disastrous, is very far from destroying all the capital which
has been added to the accumulations of the country since the last
revulsion preceding it, and that invariably room is either found or
PANICS. 81
made for the profitable employment of a perpetually increasing
capital, consistently with not forcing down profits to a lower
rate.
" This brings ns to the second of the counter-agencies, namely,
improvements in production. These evidently have the effect of
extending what Mr. "Wakefield terms the field of employment, that
is, they enable a greater amount of capital to be accumulated and
employed without depressing the rate of profit — provided always
that they do not raise to a proportional extent the habits and re-
quirements of the laborer.
" If the laboring class gain the full advantage of the increased
cheapness — in other words, if money-wages do not fall — profits are
not raised, nor their fall retarded. But if the laborers people up to
the improvement of their condition, and so relapse to their previous
state, profits will rise. All inventions which cheapen any of the
things consumed by the laborers, unless their requirements are
raised in an equivalent degree, in time lower money-wages ; and, by
doing so, enable a greater capital to be accumulated and employed
before profits fall back to what they were previously."
When Mill says that " the remedy is not a diminution
of supply," he is right, if by remedy he means preven-
tion. The evil has not been caused by any excess of
production, but by the non-utilization, in either productive
or unproductive consumption, of too great a portion of
what has been produced. If he means that it is not the
proper remedy after the crisis has occurred, he is right
only if he means to advocate, which he is far from doing,
the absolute destruction or unproductive consumption of
excessive dead stock. But, as this will seldom take place
naturally, the diminution of supply, undesirable as it is,
is the only remedy the undisturbed action of economic
law supplies, and the sole means by which the readjust-
ment of capital to population is in practice effected.
There is too self-evident an appeal to facts for this to be
denied, nor does Mill deny it, contradictory as it is to his
82 CAPITAL AND POPULATION.
assertion, but explicitly asserts it in the passage which I
have italicized in the last quotation.
But I further assert that credit is never a cause of
crises at all, but only an accelerating influence, by which
I mean that, as prices would then be stationary or nearly
so, a crisis could never occur from any extension of credit
not accompanied by over-accumulation ; while the latter
would periodically produce seasons of industrial inactivity,
even if business were conducted on a strictly cash basis.
In saying this, I, of course, do not mean to assert that
credit is without influence. Its influence is undeniably
great, and the larger part of .the losses society sustains
through its enforced periods of industrial inactivity must
be attributed to it. All that I contend for is, that it
must be considered only as intensifying effects due to
over-accumulation, and that would not occur at all with-
out over-accumulation.
Gold and silver, leaving out of view their use as com-
modities, subserve a double purpose. They act as the
standard of value, and as the medium of exchange. If
they had never been supplemented by credit, their value
would be many times greater than it now is.
"Having now formed a general idea of the modes in which
credit is made available as a substitute for money, we have to con-
sider in what manner the use of these substitutes affects the value
of money, or, what is equivalent, the prices of commodities. It is
hardly necessary to say that the permanent value of money — the
natural and average prices of commodities — are not in question here.
These are determined by the cost of producing or of obtaining the
precious metals. An ounce of gold or silver will, in the long run,
exchange for as much of every other commodity as can be produced
or imported at the same cost with itself; and an order or note of
hand, or bill payable at sight, for an ounce of gold, while the credit
of the giver is unimpaired, is worth neither more nor less than the
gold itself." — (Mill, Book III, chapter xii, section 1.)
PANICS. 83
Nevertheless, credit does permanently affect the value
of gold, because it affects the amount needed. Every
time (other things remaining the same) credit supplies the
function of gold in exchange, it depresses its value. If
the value sinks below the cost of production, the value of
gold is not thereby eventually raised, but the cost of pro-
duction is itself lowered by the abandonment of some of
the poorer mines. If credit did not exist, we should have
more gold and silver, and they would be of greater value.
While their production would have been greatly stimu-
lated, and while we would possess several times the
amount we do now, the money prices of other articles
would be but a small fraction of what they are now. The
introduction of credit has rendered unnecessary a great
amount of labor that would otherwise have been expended
in their production, and has saved a very considerable
loss that would have occurred through their greater de-
struction by accident and wear. It has also yielded a
further gain in the convenience, or lessened labor, by
means of which exchanges are effected.
What concerns us more nearly, however, is the effect
of credit upon prices, and through them upon production,
consumption, and accumulation. Credit, no matter what
its form, does not increase capital, but it does increase
the availability or effectiveness of capital. It facilitates
exchange, stimulates production, and places the existent
capital in the hands of those most disposed to make in-
vestments — thus leading to a more rapid accumulation.
But, in the end, supposing the same state of civilization
to be reached without it as with it, it decreases the pos-
sible accumulation of capital, both because of the smaller
amounts of the precious metals that the community will
accumulate, and because a smaller amount of more avail-
84 CAPITAL AND POPULATION.
able capital will suffice for the needs of production — tliat
is, under the credit system — as capital will be more ac-
tive, a smaller amount will be needed ; and the normal
ratio of capital to population will be lessened. Besides
the economies already noticed, the credit system confers
a benefit upon society in that it lessens the relative
amount of savings and investments that the growing
needs of society demand.
If gold and silver were our only mediums of exchange,
the fluctuations in prices, that depend upon their relative
amount, would be greater than they now are. Any in-
creased demand upon them as mediums of exchange may
now be partly met by an extension of credit, or an im-
provement in its methods which may carry the com-
munity over the period of their relative scarcity without
much depressing prices. The production of the precious
metals is very variable in amount, but the effect of their
greater or less production upon prices is largely modified
by the credit system, because it now performs the greater
portion of their functions, and in so doing possesses an
elasticity which specie does not, because the latter can
only increase in its amount, when the demand for it is
great, through importation of the precious metals or by
the slow process of greater activity in mining, whereas
credit expands of itself with every fresh demand upon it
as a medium of exchange, without much affecting prices.
The fluctuations in prices, that depend upon the greater
or less activity of exchanges, would be much less if we
had no system of credit. The demand upon gold and
silver, if we depended upon them alone, resulting from
any increase of prices or unusual activity of exchanges
would be immediately felt, and the value of the precious
metals relative to other commodities increased, which is
PANICS. 85
to say that the prices of other commodities would soon
fall, and the activity of exchanges be checked ; whereas
under the credit system the increase of credit that always
accompanies an increase in the activity of exchanges
helps to sustain prices. As the fluctuations that depend
upon the activity of exchanges are vastly more numerous
than those depending upon the abundance or scarcity of
the precious metals, it is evident that fluctuations are very
much more frequent, sudden, and greater in amount,
under the credit system.
While it allows greater latitude for fluctuation in
prices, any extension of credit, no matter what its form
— whether it be an increase of currency, an extension of
bank credits, or the greater facility with which time-pur-
chases are made — ^raises the prices of all commodities, not
only by the creation of a greater demand, but by its dis-
turbance of the ratio of the amount of the commodities
to the amount of their medium of exchange. That is to
say, the increase of credit tends to raise prices by depre-
ciating the value of the medium through which commod-
ities are exchanged, and also to raise them through the
stimulation of demand that results from the additional
facility it gives to exchange and production.
Any rise in prices is primarily and mainly a benefit
to the capitalist, who possesses the commodity enhanced
in value. It is a profit to him additional to the legitimate
return for the use of capital he was before receiving for
producing or transferring that commodity. Such profit
represents no gain of any kind to the community, but
only a transfer from the pocket of the consumer to the
pocket of the capitalist exactly equal to the increase in
the price of the commodity. A general rise in prices
simply means that capital receives a larger, and labor a
86 CAPITAL AND POPULATION".
smaller, proportion of the total production, tlian thej were
receiving before it took place. As such rise always stim-
ulates production, the amount to be divided is greater,
and the absolute share of the laborers may be, and usu-
ally is, larger than before ; but their relative share is less.
Capital receives the larger share of the benefit of the in-
creased activity.
We see, therefore, that the effect of the credit system,
when it commences to act upon a normal ratio of capital
to population, is to stimulate prices and increase profits,
and to hasten the over-accumulations that are inevitably
made from excessive profits, and which necessitate a fol-
lowing period of inactivity and decline.
But it has a further effect. ISTot only does the credit
system shorten the rhythm of activity and idleness, but it
renders the fluctuations more variable in their effect upon
individuals. If every article were paid for by its purchaser
at the moment of purchase, the benefits of a general rise
in prices would be distributed among all the holders of
property, each of whom would gain a slight increase of
wealth ; but, when the articles enhanced in value have
certain fixed claims against them, the proportional benefit
to their possessors is thereby increased. A rise in price
of ten per cent gives an extra profit of ten per cent on
articles fully paid for ; but if half the purchase-money is
yet due, the profit is twenty per cent on the possessor's
real interest in them. "When credits are very much ex-
tended, a rise in prices, instead of making small additions
to many incomes, makes larger additions to fewer incomes.
The larger sudden additions to incomes are, the larger will
be the proportion of them that will be invested, and the
smaller will be the increase of expenditure. Thus, again,
we find that credit hastens over-accumulation.
PAMCS. 87
Having now reached the top of the wave, we will fol-
low it over the crest to its decline. Higher prices can
only be maintained when they are the result of perma-
nent causes, and such causes must not only be permanent
but world-wide. There are such causes, and they can all
be resolved into the permanent increase of the proportion
which the medium of exchange, whether gold or credit,
bears to the amount of commodities seeking exchange.
The world has experienced such an increase for several
centuries and still continues to experience it. It has
been, and is, both a cause and result of advancing civili-
zation. But any permanent advance in prices must not
only proceed from permanent causes, but from causes that
equally affect those portions of the civilized world that
exchange any considerable proportion of their production
with others. When any single nation, by increasing its
medium of exchange, or from any other cause, raises the
money prices of its commodities more than its neighbors,
it immediately places itself at a disadvantage as compared
with them ; and they are enabled to undersell it in both
its own and foreign markets. The productions of a na-
tion so situated must accumulate within its own borders.
It will also accumulate foreign productions, which will
commence to occupy its home market. Such a nation is
finally forced to reduce its production. Until it does so
its imports will exceed its exports ; or, in other words, it
will borrow of other nations, and must pay a portion of
its income to them as interest. If it does not pay the
balance due, in gold and silver, and its creditors do not
choose to make a permanent investment of their advances,
the rate of exchange, or the equation of international de-
mand, will be against it, which again places it at a com-
mercial disadvantage. If they do permanently invest
88 CAPITAL AND POPULATION.
such advances, foreign capital is brought into competition
with home capital at the very time that excessive profits
and investments have made capital superabundant. The
only escape from the inevitable result of this state of
things is the general reduction of prices. The higher
and more rapid their rise has been, the lower and more
sudden their fall must be.
But this fall is no more a loss to the community than
their rise was a gain. The property of the community
is exactly what it was when every one was apparently
wealthy. Like the rise, the decline is a mere transfer of
values ; but now it is the consumer who gains, and the
capitalist who loses. The only loss to the nation is on
the relatively small portion of the production it exports,
as its gain in the rise was also on its exports. This loss
is trivial, and is balanced by a previous fictitious gain.
The real injury to the community is the very serious loss
of its labor, forced to be idle during the period of depres-
sion.
The elTect of credit on this transfer of value is to dis-
tribute the loss in a manner very different from its natu-
ral proportions. If there were no indebtedness, the losses
consequent upon the fall in prices would be distributed
jpro rata among all the possessors of commodities. But
if, as before supposed, these possessors were indebted for
haK the purchase value of their goods, the loss to them
is doubled, while the lenders lose nothing unless the de-
cline is so great as to invalidate their security.
If this loss were distributed as evenly as it would be
if the credit system did not exist, it would cause little
suffering and no alarm, because no one could become in-
solvent. The worst that any would suffer, would be a
slight reduction of capital and income, to which they
PANICS. 89
could readily adjust their affairs. But the loss being con-
centrated upon a few, who are indebted in certain fixed
sums, it renders so many of them insolvent, that lenders,
becoming alarmed for the adequacy of their security,
contract credits as much and as suddenly as they possibly
can. Kow, this process not only forces a further decline
in prices, by stopping all the demand that proceeds from
investment, but also by forcing holders of property to
sell at any price, in order to obtain means for the repay-
ment of indebtedness for which they can no longer ob-
tain credit. It also forces prices down, by lessening the
proportion of the medium of exchange to the g,mount of
commodities seeking exchange. The fearful disturbance
of the social organism that the severity of this process
causes has been too vividly experienced by us all to need
further elucidation. We have merely to remark that the
effect of the credit system is to depress prices in a time
of depression more than they otherwise would be, as well
as to raise them in times of prosperity higher than they
would otherwise go. JSTeither their rise nor fall is a gain
or a loss to the community; but the widening of the
fluctuations is an evil, in that it increases the idleness, or
loss of labor, which is the real and only injury that panics
cause.
But prices in any nation can no more be kept perma-
nently below prices in other nations than they can be kept
above them ; nor can they long be kept at a point that
forbids profit. The loss being merely a transfer from the
property to the consuming classes, the consuming power of
the latter, though absolutely less, is, relatively to produc-
tion, greater than before. Over-accumulations cease —
profits being too small to allow them to be made. Exports
once more exceed imports ; the suffering nation, again
90 CAPITAL AND POPULATION
able to produce as cheaply as, or cheaper than, its neigh-
bors, repays its foreign indebtedness, and resumes its con-
trol of home and foreign markets, and the rate of ex-
change and the equation of international demand are again
in its favor. The nation re-enters upon a period of pros-
perity and advancing prices, in which it proceeds with
accelerating progress, again to suffer from its economic
mistake of endeavoring to be richer than economic law
allows.
"We are now entitled to state that panics are the sud-
den and violent readjustment from an abnormal to a
normal ratio of capital to population. Their cause is
solely the disturbance of this ratio. The only effect of
the credit system is to accelerate the rhythm and increase
the extent of the fluctuations above and below the point
at which the ratio harmonizes with the present state of
society.
If the large profits resulting from a rise in prices were
expended wholly for productive and unproductive con-
sumption, and did not result in any increase of " dead
stock " either fixed or circulating, the rise of price would
be maintained, for the efficient demand would always
equal the supply, however great the latter might be, and
production would continue to be as profitable as before.
There would be, to be sure, a redistribution of wealth,
but, as long as the ratio of capital to population was not
really disturbed, further fluctuations in general prices
would be only such as would result from false suppositions
that the ratio was disturbed. As further investments
would not be made, or, if made, would continue to be
profitable because their amount would be strictly propor-
tional to the increase of population, a collapse of credit,
however extended it might be, could hardly occur, for
PANICS. 91
confidence could not be shaken when it was felt that
dead stock was not in excess. Such a balance of popula-
tion and capital is of course chimerical. It is too ideal
a state of society to be hoped for or expected. It is quite
within the province of reason, however, to show that some
approximation to it is possible, and that its full attain-
ment would free us for ever from commercial crises.
As the result of our investigations, we are also enti-
tled to state that the benefits we derive from the credit
system — when the point has been reached in a nation's
history at which a tendency to over-accumulation begins
to show itself — can all be resolved into the reduction of
the proportion which capital normally bears to population ;
and its evils, into the intensification of the temporary
fluctuations it causes in the ratio of capital to population.
The permanent rise in prices which, as before ex-
plained, we owe to the credit system, may perhaps be con-
sidered as an exception to this remark. Any permanent
advance of the point about which prices tend to fluctuate
prolongs the period of large profits in which it takes place,
without prolonging the following period of reaction. It
would seem, therefore, that it must also increase the totality
of production, and the augmentation of capital such in-
crease of production demands and justifies. We have
seen, however, that this is not an advantage, unless the total-
ity of unproductive consumption is also increased. That
it does this is not so clear, but may still, we think, be assert-
ed. Increase of production is always attended by some
increase of consumption ; but the proportion between the
two is much less disturbed by a gradual than by a sudden
rise of prices. A sudden increase of income will yield a
larger percentage for investment than a gradual one of
equal extent. The more gradual it is, the closer wiU the
92 CAPITAL AND POPULATIOIT.
increased expenditure approximate to tlie increased in-
come, and, if it be very gradual, may almost or quite
equal it. Now, this permanent rise in prices is very
gradual, having extended over several centuries, and it
has undoubtedly been wholly utilized in unproductive
consumption, and not wasted in uncalled-for saving. But,
if this explanation is the true one, this benefit which we
derive from credit is analogous to the others, in that it
results from an increase of unproductive consumption,
without any more than a corresponding and fit increase of
capital.
Our principle has now afforded us a reasonably f iill
and accurate explanation of the cause and action of pan-
ics as affecting individual nations. It might seem, at
first sight, that, where all nations advanced with nearly
equal rapidity, and at the same time, toward higher
prices and more extended credits, the result would be a
permanent rise of prices from which no reaction could
possibly follow. Steam and electricity are making one
commercial community of the nations. Economic rela-
tions are now so intimate and so sensitive, that we may
hereafter expect that the alternations of activity and stag-
nation will become more and more uniform, both in ex-
tent and time, for all communities. As two vibrating
chords, when brought together, tend to vibrate in unison,
so the commercial rhythms of separate nations tend to
uniformity as distances are annihilated. This uniformity
of rhythm, in proportion as it is perfect, removes the
restraint upon each other's inflation of credit and prices
which has been hitherto exercised. But it never can be
perfect, and always will allow some portion of the re-
straining influence to be exerted. Although it may
lengthen the rhythm of activity and idleness, it can never
PANICS. 93
destroy it, but will rather tend to its intensification. We
may expect these states, when more universal, to be
longer in their continuance and more extreme in their
intensity ; but they will continue as before in all other
respects. Their real, indeed their only, cause is over-
accumulation. The only difference is, that the relief from
their burden is longer deferred, and more tedious when
commenced, where the difficulty of distributing the over-
accumulations among foreign nations is enhanced. This
can not be done so effectively where all are suffering, in
nearly equal degree, from the same cause.
It has hitherto been claimed that a " general glut "
was impossible ; that the world could not have too much
of everything. But facts are stubborn things, and some-
thing very like it has come to pass. A general glut is the
result, not, as Mill assumes, of over-production, but of
over-accumulation ; and we have seen, not only that this
is possible, but that the tendency of society toward such
a state is constant so long as it possesses an imdue pro-
portion of the accumulating class. We have also seen
that the credit system intensifies the tendency to over-
accumulation, both in its beneficial effect of lessening the
necessary proportion of capital to population and in its
evil tendencies of stimulating the fluctuation of prices,
and confining the consequent gains and losses to fewer
individuals without lessening their amount. All these
causes act over the whole area as certainly and as system-
atically as over any particular portion. The only differ-
ence that their universal rhythm makes to any particular
nation is, that it takes away, to the extent in which it
occurs, the opportunity of relieving the home markets
by exporting the surplus which is depressing them, to
other nations that will not or can not take it when they
94 CAPITAL Al^D POPULATION.
are oppressed in like degree with a superabundance of
dead stock. Except as modified b j this one circumstance,
the readjustment of capital to population proceeds exactly
the same when the periods of alternating activity and
stagnation coincide as when they are independent. The
cause of panic and depression is not -in the least altered
by the periodical coincidence of industrial activity. De-
cline in prices and production must follow over-accumula-
tion, and collapse of credit must follow decline in prices,
so long as the consequent transfer of property from the
capitalist to the consumer is at the expense of a few
of the capitalists, instead of being distributed pro rata
among them.
The loss of confidence which constitutes the essential
nature of panic as distinguished from stagnation can only
result from the anticipation of a decline in prices. But
a decline in prices can only be effected by a decrease in
the medium of exchange or an increase in the amount of
commodities to be exchanged ; the latter cause can only
result from over-accumulation, and the former from a
destruction or exportation of the precious metals. The
fact that in any nation prices are higher than in the rest
of the world will lead to such exportation, and also if
speculation at' any time should raise prices above the
level determined by the ratio of commodities to the
medium of exchange, so that production was yielding
more than its normal rate of profit, an exportation of
gold would take place sufficient to soon reduce prices
and profits to the normal rate. This fall in prices, when
anticipated, would cause, undoubtedly, some loss of con-
fidence, but, if at the time the proportion of capital to
population was not too large, the rate of profit could not
fall to a point that would materially decrease production.
PANICS. 95
In an isolated nation which neither imported nor export-
ed gold, general prices would be wholly governed by the
increase or decrease of capital as compared with popula-
tion. Speculation would affect particular not general
prices, and that only temporarily. The amount of pro-
duction, within certain limits never practically reached,
would be strictly inverse to the amount of accumulation ;
and it is hardly conceivable that any disturbance of con-
fidence and credit, not proceeding from an abnormal
cause, such as war, could lead to any considerable cessa-
tion of industry, as long as capital continued barely suf-
ficient for the needs of population. IRothing that could
be dignified with the name of a commercial crisis could
occur as long as production was sufiiciently profitable.
The world as a whole must be considered as an isolated
nation, and no disturbance of credit and confidence can
therefore be a sufficient cause for a world-wide depres-
sion. That cause can only be found in general over-
accumulation. When, therefore, I claimed over-accu-
mulation as the sole cause of commercial crises I meant
general, not national crises. The latter may be brought
about by the exportation of gold, but can never be very
severe if the normal ratio of capital to population has not
been too much disturbed.
My arguments, if valid, surely supply the only satis-
factory explanation of commercial crises ever advanced ;
and that they do so is certainly an important verification
of the deductions made, and entitle them to more con-
sideration than similar ideas have heretofore received.
There has been, indeed, much excuse for the neglect and
even the contempt with which somewhat similar views
have been regarded, as they have heretofore been pre-
sented in language, apparently at least, subversive of
6
96 CAPITAL AND POPULATION".
many of tlie best-established results of the science. I
have labored, I hope not without success, to show that
they are really in accord with the ideas and results of
the best thinkers, and that these themselves, as well as
their less able opponents, are not free from confusion
in their use of terms, and that, when inaccuracies of
statement and definition are removed, the views of
those on both sides of the dispute are seen to coincide
with results, as we shall see later on, in the practical ap-
plication of the science, as well as in its theories, contem-
plated by neither.
CHAPTEE YI.
CREDIT.
Although not so strictly in tlie line of our argument,
some criticisms upon Mill's view of credit will be advis-
able, as his accuracy of statement and clearuess of percep-
tion on tbe subject have been somewhat impaired by his
ambiguous conception of what constitutes the loanable
fund.
In Book II, chapter xv, section 4, he says :
"There is scarcely any dealer or producer on a considerable
scale, who confines his business to what can be carried on by his
own funds. When trade is good, he not only uses to the utmost his
own capital, but employs in addition much of the credit which that
capital obtains for him. "When, either from over-supply or from
some slackening in the demand for his commodity, he finds that it
sells more slowly or obtains a lower price, he contracts his opera-
tions, and does not apply to bankers or other money-dealers for a
renewal of their advances to the same extent as before. A business
which is increasing holds out, on the contrary, a prospect of profit-
able employment for a larger amount of this floating capital than
previously, and those engaged in it become applicants to the money-
dealers for larger advances, which, from their improving circum-
stances, they have no difficulty in obtaining. A different distribu-
tion of floating capital between two employments has as much effect
in restoring their profits to an equilibrium as if the owners of an
equal amount of capital were to abandon the one trade and carry
their capital into the other. This easy, and as it were spontaneous,
98 CAPITAL AND POPULATIOK
method of accommodating production to demand is quite sufficient
to correct any inequalities arising from the fluctuations of trade, or
other causes of ordinary occurrence."
If Mill had been a merchant, lie could hardly have
failed to see that the process he here explains is not
what really occurs.
"When goods accumulate, and trade becomes poor, the
demand for loans increases, they being evidently needed
by the producer to enable him "to carry" his goods ; or,
if he has parted with them to a speculator or jobber, they
will need loans to the same extent, except as they employ
their own capital for the purpose ; but this is equivalent
to the other, as thereby the same amount of funds is
removed from the loan market. The number of discounts
in such times will be less, because that depends largely
upon the activity of exchange, which is then much re-
duced ; but the amount on loan, or withdrawn from the
loan market to carry unsalable goods, will be larger than
ever, and will be greater in those trades in which the
greatest accumulations have taken place and which are
consequently the dullest. When, on the contrary, any
particular trade is brisk, the amount that will be loaned
to it, for the purpose of carrying its dead stock, will be
small. When, however, the profits of any trade are so
large as to lead to new investments of fixed capital in it,
its demand for loans will increase, both because to some
extent such investments will be made from • borrowed
funds, and because, when made by those belonging to
the owners, they remove an equivalent amount of funds
from the loan market. An active trade demands more
active stock but less dead stock than a depressed one, and
usually, indeed, we may say always, depends less for its
circulating capital upon the loan market. In active times,
CREDIT. 99
the decrease in the demand for loans to carry dead stock
is greater than the increase of loans to be employed pro-
ductively, and any increase in the amount on loan must
be attributed to the demand for purposes of fixed invest-
ment ; except, indeed, shortly before a crisis occurs, when,
the amount of dead stock having greatly increased and
nearly reached its limit, large loans will also be needed
to carry it. In active times, therefore, a great increase
of the amount on loan is a sign that accumulation is
rapidly approaching its limit, and that a reaction may
soon be expected.
In Book III, chapter xxiii, section 3, Mill says :
*'I have, thus far, considered loans, and the rate of interest, as a
matter which concerns capital in general, in direct opposition to the
popular notion, according to which it only concerns money. In
loans, as in all other money transactions, I have regarded the money
which passes, only as the medium, and commodities as the thing
really transferred — the real subject of the transaction. And this is,
in the main, correct ; because the purpose for which, in the ordinary
course of affairs, money is borrowed, is to acquire a purchasing
power over commodities. In an industrious and commercial coun-
try, the ulterior intention commonly is, to employ the commodities
as capital ; but even in the case of loans for unproductive consump-
tion, as those of spendthrifts, or of the government, the amount
borrowed is taken from a previous accumulation, which would oth-
erwise have been lent to carry on productive industry; it is, there-
fore, so much subtracted from what may correctly be called the
amount of loanable capital.
" There is, however, a not unfrequent case, in which the purpose
of the borrower is different from what I have here supposed. He
may borrow money, neither to employ it as capital nor to spend it
unproductively, but to pay a previous debt. In this case, what he
wants is not purchasing power, but legal tender, or something
which a creditor will accept as equivalent to it. His need is specific-
ally for money, not for commodities or capital. It is the demand
arising from this cause which produces almost all the great and
100 CAPITAL AND POPULATIOK
sudden variations of the rate of interest. Such a demand forms one
of the earliest features of a commercial crisis. At such a period,
many persons in business, who have contracted engagements, have
been prevented by a change of circumstances from obtaining in
time the means on which they calculated for fulfilling them. These
means they must obtain at any sacrifice, or submit to bankruptcy ;
and what they must have is money. Other capital, however much
of it they may possess, can not answer the purpose unless money
can first be obtained for it; while, on the contrary, without any
increase of the capital of the country, a mere increase of circulating
instruments of credit (be they of as little worth for any other pur-
pose as the box of one-pound notes discovered in the vaults of the
Bank of England during the panic of 1825) will effectually serve
their turn, if only they are allowed to make use of it. An increased
issue of notes, in the form of loans, is all that is required to satisfy
the demand, and put an end to the accompanying panic. But, al-
though in this case it is not capital or purchasing power that the
borrower needs, but money as money, it is not only money that is
transferred to him. The money carries its purchasing power with
it wherever it goes ; and money thrown into the loan market really
does, through its purchasing power, turn over an increased portion
of the capital of the country into the direction of loans. Though
money alone was wanted, capital passes ; and it may still be said
with truth that it is by an addition to loanable capital that the rise
of the rate of interest is met and corrected.
" Independently of this, however, there is a real relation, which
it is indispensable to recognize, between loans and money. Loan-
able capital is all of it in the form of money. Capital destined di-
rectly for production exists in many forms ; but capital must always
be such as to adjust these two amounts to one another.* But while
* I do not include in the general loan-fund of the country the capitals,
large as they sometimes are, which are habitually employed in speculatively
buying and selling the public funds and other securities. • It is true that all
who buy securities add, for the time, to the general amount of money on
loan, and lower, to that extent, the rate of interest. But as the persons I
speak of buy only to sell again at a higher price, they are alternately in the
position of lenders and borrowers : their operations raise the rate of inter-
est at one time, exactly as much as they lower it at another. Like all per-
sons who buy and sell on speculation, their function is to equalize, not to
CREDIT. 101
the whole of this mass of lent capital takes effect upon the perma-
nent rate of interest, the fluctuations depend almost entirely upon
the portion which is in the hands of bankers ; for it is that portion
almost exclusively which, being lent for short times only, is contin-
ually in the market seeking an investment. The capital of those
who live on the interest of their own fortunes has generally sought
and found some fixed investment, such as the public funds, mort-
gages, or the bonds of public companies, which investment, except
under peculiar temptations or necessities, is not changed.
" Fluctuations in the rate of interest arise from variations either
in demand for loans or in the supply. The supply is liable to vari-
ation, though less so than the demand. The willingness to lend is
greater than usual at the commencement of a period of speculation,
and much less than usual during the revulsion which follows. In
speculative times money-lenders, as well as other people, are in-
clined to extend their business by stretching their credit ; they lend
more than usual (just as other classes of dealers and producers em-
ploy more than usual) of capital which does not belong to them.
Accordingly, these are the times when the rate of interest is low ;
though for this, too (as we shall hereafter see), there are other
causes. During the revulsion, on the-ciisntrapy^ interest always rises
inordinately, because, while there i^ a most pressing need on the
part of many persons to borrow, thoi?e is a. ^cin^r^h^isii^ds'nfTtion to
lend. This disinclination, when at its exti'eme point, is called a
panic. It occurs when a succession of unexpected failures has cre-
ated, in the mercantile, and sometimes also in the non-mercantile,
public, a general distrust in each other's solvency ; disposing every
one not only to refuse fresh credit, except on very onerous terms,
but to call in, if possible, all credit which he has already given. De-
posits are withdrawn from banks ; notes are returned on the issuers
in exchange for specie; bankers raise their rate of discount, and
withhold their customary advances; merchants refuse to renew
mercantile bills. At such times the most calamitous consequences
were formerly experienced, from the attempt of the law to prevent
more than a certain limited rate of interest from being given or
raise or lower the value of the commodity. When they speculate prudent-
ly, they temper the fluctuations of price ; when imprudently, they often ag-
gravate them.
102 CAPITAL AND POPULATION.
taken. Persons wlio could not borrow at five per cent had to pay,
not six or seven, but ten or fifteen per cent, to compensate the lender
for risking the penalties of the law ; or had to sell securities or
goods for ready money at a still greater sacrifice.
"In the intervals between commercial crises there is usually a
tendency in the rate of interest to a progressive decline, from the
gradual process of accumulation ; which process, in the great com-
mercial countries, is sufficiently rapid to account for the almost pe-
riodical recurrence of these fits of speculation ; since, when a few
years have elapsed without a crisis, and no new and tempting chan-
nel for investment has been opened in the mean time, there is always
found to have occurred in those few years so large an increase of
capital seeking investment as to have lowered considerably the rate
of interest, whether indicated by the prices of securities or by the
rate of discount on bills ; and this diminution of interest tempts the
possessor to incur hazards in hopes of a more considerable return.'"
Mill has, apparentlj, nowhere attempted to ascertain
what portion of the general fund constitutes the loanable
fund, but seems to suppose that it is composed of a part
only of t}ie general^ fimd'. -, It is evident that the loanable
fund is not composed of money, as its sum is many times
too layg6,"l?llaii|gii''Mi{l ^ems tb imply it by the assertion
that it is always in the form of money ; as far, indeed,
as money is concerned, the loanable fund of a community
is only temporarily diminished by a loan being effected.
Such loan is very soon deposited by the borrower, and
there is as much money to lend as before. The amount
the community carry in their pockets and the amount in
transit may, indeed, vary somewhat, but such variance is
trivial in amount, though not in its effects. What, then,
constitutes the loanable fund? It is evidently the dis-
posable goods, the capital stock of the community ; but
what constitutes the demand for loans ? It is as evidently
the same capital stock that can be given as security. Not
that all goods form a part of the demand and of the sup-
CREDIT. 103
ply of loanable funds, but, when goods form no part of
the one fund, neither do they of the other. When the
owner of any commodities is able to carry them without
borrowing, they form neither a part of such demand nor
supply ; it is only when he effects their exchange, or, what
is equivalent to exchange, raises a loan upon them as se-
curity, that the loan market is affected, and such transac-
action affects the supply and demand equally. The loan
market, then, is as purely a case of reciprocal demand as
the general market for commodities, in which, as Say has
shown, demand can never exceed supply, or supply de-
mand.
By demand for loans I, of course, mean an efficient
demand. The mere desire to borrow is much great-
er than the desire to lend without adequate security.
From personal motives money is sometimes so lent, but,
when it is, the desire of the borrower by that very cir-
cumstance has become an efficient demand. What is
really transferred by a loan is not money, but the use
of capital — or, rather, the use of material wealth in the
broadest sense of the term, as the lender may, or may not,
intend to employ such wealth productively. Now, it is
evident that all the wealth of the community can be
loaned if its owners are willing to loan it, and others are
willing to borrow it of them ; but when this was effected
there would be no decrease of loanable funds, for the
original borrowers could loan it all over again to others,
if so disposed.
If by loanable is meant, not, able to be loaned, but,
what will be loaned, that amount, of course, will be gov-
erned by the inducements held out by borrowers. What
those inducements must be will depend mainly upon the
exchangeable value of the use of capital, i. e., upon the
104 CAPITAL AND POPULATION.
rate of profit, in operations similarly situated as to diffi-
culty and risk. But such inducement, to be an effect-
ual one, will not have to be at all enhanced on account
of any increase in the amount of loans made, except
as such increase enhances the risk of lending. The
amount of commodities that can be lent is exactly the
same, after they are loaned, as before. "We are justi-
fied in considering the loan of money as a purchase,
and its repayment as a repurchase, of the commodities
which form the security, and interest as the profit that
accrues on the transaction, and, if it is less or more
than other profits, it will only be because it entails less
or more of risk, trouble, and skill. Independent of
these, interest will follow the same law as profits, be-
cause it really is a profit.
But there is one radical distinction between profits
and interest. Profits rise when prices rise or when
money-wages fall, and fall when prices fall and money-
wages rise. But a fall in prices is the same as a rise in
the value of money. The profit of owning or lending
money, therefore, the rate of interest remaining constant,
rises when prices are declining, and falls when prices
rise. Interest may be very low and the gross profit of
owning obligations due in money may be very great. On
the other hand, when prices are advancing, the gross
profit is less than the interest, because the value of the
principal, when it is returned, will be less. Interest is
only equivalent to profit in cases where prices remain
uniform during the life of the loan. When prices are
declining, therefore, the borrowing producer will be will-
ing to pay a very small interest, because he expects to be
obliged to repay to the lender a greater value than he re-
ceived from him, and the lender will be willing to receive
CREDIT. 105
a very small rate, as he expects to receive in repayment
a greater value than he parted with. But, if he expects
prices to decline, a mere speculator will not pay even a
small rate of interest, because in such case, as he is not
a producer, there will be no profit at all for it to be sub-
tracted from, but a loss to be added to the interest he
pays. We see, therefore, that it is utterly impossible for
a large accumulation of wealth of itself to lead to any
speculation. If prices have, indeed, declined too far,
some advance in them may be looked for, but, as long
as stocks continue large, every one knows that it can be
but a moderate one, and no great speculation can ensue.
That is a luxury that the community only indulges in
when there is apprehension of a scarcity. Mill's explana-
tion of panics, as due to the speculation engendered by a
low rate of profit and the accumulation of capital for
which no legitimate avenues of investment are open, is
not only inadequate, but diametrically opposed to what
really occurs. When commodities are scarce, speculation
really sets in. There are always in the community
shrewd individuals who perceive that a scarcity is immi-
nent, and buy for a rise before prices are affected, or fully
affected, and they are the better enabled to do this be-
cause, their speculations being more or less closely con-
fined to the commodities in which they are accustomed
to deal, they have better means of information than others
as to the quantity of them in existence. It will soon be
found, however, after a period of low profits and prices,
that other articles are also scarce, and speculation will be-
come more and more general, and prices will advance all
along the line.
But such speculative purchases will not at all affect
the propoisfcional amount of loanable funds to the demand
106 CAPITAL AND POPULATIOK
for them, though they will very much increase the num-
ber of exchanges of property and the number of discounts
that will be called for. They have a powerful effect in
increasing the amount of productive consumption, as they
relieve the producing classes of the dead stock they w^ere
carrying, and supply them with money or the right to
demand money, from which alone the wages-fund can be
supplied. Before they were so relieved, the producers
were forced into the loan market, pledging their goods to
avoid the necessity of overpressing the sales of their
dead stock. The speculators merely take their place as
borrowers, and do not even increase the activity of the
loan market, except as they purchase and repurchase of
each other.
When the crisis has come and prices begin to tumble,
the high rate of interest likewise is no proof of the scar-
city of loanable funds in proportion to the demand. It
is caused by the greater supposed risk then incurred in
lending, and the anxiety of bankers to retain more than
their proportion of the reserve, and is really somewhat
mitigated by the expectation of a decline in general
prices.
What, then, does determine the average rate of inter-
est ? We may answer that it will be such percentage of
the principal as, together with an addition for any ex-
pected fall, or with a subtraction for any expected rise in
general prices, will equal the average rate of profit of
other capital similarly circumstanced as to risk, trouble,
and skill. While the average rates of interest and profit
bear a constant ratio to each other, the rates that prevail
at any particular time do not do so, but may vary almost
indefinitely, and the one affords but a slight indication of
what the other is. The only law that we can. affirm is,
CREDIT. 107
that during dull times the rate of interest tends to be
lower than the rate of profit, and during good times,
when prices are advancing, higher, except as affected by
the risk involved.
To illustrate our meaning, wdiich is, perhaps, as yet
obscure to the reader, let us suppose five capitalists — M,
B, W, R, and F — whom we will consider to represent
five separate classes, and to constitute, with the laborers,
a community by themselves. Let M be a manufacturer ;
B, a banker ; W, a wholesaler or jobber ; R, a retailer ;
and F, a farmer. Let us further suppose them all to be
possessed of an equal amount of circulating capital : M's
will consist of manufactured foods and F's of raw prod-
ucts and food, while Ws and R's will be composed partly
of goods and partly of food and raw products, and B's
will be money.
Now, in a state of barter, M and F would exchange
with each other directly, or indirectly through "W" and R,
and B's capital would lie idle. Under a cash system, B's
capital would come into play. He would, at first, be the
only purchaser, and would buy, as the humor took him,
indifferently from the other four ; but he could only pur-
chase for unproductive consumption, and would finally
be eliminated from the problem. Under the credit sys-
tem, he would, however, be able to obtain a profit for his
capital. M and F are both desirous of disposing of their
stock, but neither wants the goods of the other, nor those
of W and R. What they do want is money with which
to pay wages and continue their productive consumption.
"W and R desire to dispose of their goods and buy those
of M and F, but can not do so unless they can get the
money. W, therefore, goes to B, and pledges his capital
for money, with which he buys M's goods, who imme-
108 CAPITAL AND POPULATION".
diatelj deposits the money with B, or W gives M his
note for his goods, which B discounts for M, who pays it
out in wages, and the laborers expend the same sum with
E, who deposits it with B ; or if M's goods do not suit
W, or if M prefers to hold them, M goes direct to B and
obtains the money he needs for wages by pledging his
goods to him, and this money soon returns to B through
K or W or F. N"ow we will suppose W desirous of also
buying F's goods. He can do as he did with M, for B
has the whole of his original capital to lend him, and he
can give security upon the goods that formerly belonged
to M. Now we will suppose a second M and a second F,
with like capital and goods to the first, and W is still able
to buy their goods, because B is still able to lend him the
funds. However great the increase of M's and F's, the
original Ws, B's, and B's could take care of their trade,
provided no change in prices occurred, and the money
withdrawn by one party were immediately returned to B
by another ; and, if we suppose B to possess enough more
capital than the others to provide for such contingencies,
the last condition can be eliminated, l^ow, if by increase
of loanable funds Mill means an increase of gold or other
money, he is undoubtedly wrong in afiirming that the rate
of interest would be lowered. B, not being able at first
to loan all his capital, might for a time lower his profits
to induce the others to borrow more, but very shortly the
value of their goods would rise, and B could then employ
both his new and his old money at the previous rate. But
if Mill means the general increase of the wealth of the
community, such increase does not, imder the conditions
we have supposed, at all affect the demand and supply of
loanable funds. If we suppose them doubled all round,
or some of them doubled, some not, the ratio would be
CEEDIT. 109
the same, and, if the rate of interest truly depended upon
such ratio, it would always be uniform.
But, although the demand and supply of loanable
funds can not vary except together, the activity of the
money market may vary, just as the activity of exchange
may, although the demand and supply of commodities
are equivalent terms, and the activity of the one as of
the other will vary from the same cause, viz., the increase
or decrease of profits.
In our illustration we have supposed prices of every-
thing, labor included, to remain uniform. Now, let us
see how our five capitalists would act when prices did
vary. If all prices, including the price of labor, varied
together, as soon as exportation or importation had ad-
justed the amount of gold thereto, the old conditions
would be restored : let us suppose the prices of com-
modities fall, and the price of labor does not fall, or,
what is the same thing, that labor rises in money price,
while commodities remain stationary or fall. It is evi-
dent that M and F will borrow more than they did if
they go on producing ; but they will be under no ne-
cessity of borrowing of B at all, supposing their stock
not to be in excess of their capital and they totally cease
producing. Let us suppose that they go on producing,
but only to half the former extent ; all the exchanges we
have supposed will go on exactly as they did before, but
they will only be to about half the amount. B's capital,
as before, would remain in his hands, and the ratio of
deposits to discounts would remain nearly the same as it
previously was, and they alone constitute the demand
and supply of the loan market. B's capital, which, by
supposition, consists wholly of money, if the system of
payment is entirely by checking, will never be out of his
110 CAPITAL AND POPULATION.
hands, and is in no sense an addition to loanable funds,
but purely and simply an instrument of exchange, and
could be entirely dispensed with without any effect upon
the loan market, if it were not needed as an element of
confidence.
The cause of money being tight or plenty is that our
system of banking is not ideally perfect. If it were so,
no activity in the loan market would have the slightest
effect upon bankers' reserves ; as it is, more is required
when the sum total of discounts is large, to allow for the
transfer of funds, and this amount comes, of course, from
the reserve. Now, it is only as this reserve is affected
that lenders will be able to exact more, or be willing to
take less, than such rate of interest as will yield them the
average rate of profit at the time, consideration being, of
course, given to risk, trouble, and skill, and to the expec-
tation of a rise or decline in the exchange value of money.
Under an ideally perfect system of banking, by which we
mean that all transfers were by check alone, bankers
would be wholly unable to affect the total reserve ; and,
as it is, they have very limited power of doing it. But
individual bankers can decrease or increase their own
reserve, though at the expense of the reserves of others,
and the disposition during dull times to lend a portion of
it, and during times of activity when the reserve dimin-
ishes, or of panic when each banker desires to accumu-
late in his vaults all he can, irrespective of any profit he
may thereby fail to obtain, the eagerness to retain the
utmost share of the total reserve, enables bankers to fix
the rate of interest below or above what may be called
the normal rate. The interest of money is, therefore,
affected by the activity of the loan market, but in no
sense depends upon the ratio of demand and supply of
CREDIT. ni
loanable funds. Anything which affects the proportion
between money and other commodities affects likewise
the rate of interest, but only until prices are adjusted
to the new conditions. Great speculators frequently
avail themselves of this, and temporarily raise the rate
of interest by locking up large amounts of money; if,
however, they should permanently abstract such funds
from the circulation, the rate of interest, other things
remaining the same, would be the same as before, as
soon as prices had sufficiently fallen.
Through one circumstance, however, the increase of
loans does affect the rate of interest. We have seen that
the rate is raised by any decrease in the reserve of bank-
ers. Such reserve is needed as an element of confidence
and to allow of the fluctuations in the amount of the
individual reserves of professional lenders. We have
also seen that, when the loan market is active, the total
reserve will be decreased on account of the greater
amount of money in transit ; but in addition to this the
proportion between the reserve and the amount of loans
is disturbed by an increase of the amount on loan. This,
so far as it occurs^ impairs confidence and adds somewhat
to the risk of lending. The only influence which causes
the rate of interest to differ from the rate of profit is the
expectation that prices will decline or rise during the life
of the loan, as the difference in the nominal rates caused
by want of confidence is at bottom caused by the risk or
supposed risk involved, and this is always considered and
defined as an element of the rate of profit itself.
Mill's apprehension of the phenomena of the loan
market seems to me to be open to the same objections,
which he derives from Say, and opposes to the idea that
the supply of commodities does not itself constitute the
112 CAPITAL AND POPULATION.
demand for commodities. I liave here criticised his
Yiews, not because they have any effect upon the main
theme of this treatise — ^the relation of capital to popula-
tion — ^but because he attempts to find in them the sole
causes of commercial crises and industrial stagnation, the
comprehension of which is only possible when such rela-
tions are clearly understood. The idea that the rate of
interest depends upon the demand and supply of loanable
funds or upon the amount actually on loan at the time, is
certainly misleading; that rate is entirely governed by
the element of the supposed risk involved, and the ex-
changeable value of the use of capital at the time ; and it
is only as influencing these tw^o elements that the activity
or amount of loans has any effect.
CHAPTEE yil.
WAGES AND PROFITS
It were a desideratum in economic discussion that the
word "wages" should never be used without a prefix.
The subjects, in discussing which the term comes into
play, are so complicated that no mind is able to carry its
connotations without occasionally tripping, when the un-
qualified term is alike used for its three very distinct
significations, which I would distinguish as jproportional,
real, and money wages.
The word " proportional " is my own, and will not be
met with elsewhere, at least to my knowledge. I have
so far used it without explanation, as my meaning was
sufficiently distinct for the previous stages of the argu-
ment. Mill and Ricardo express the idea by the generic
term " wages " alone, and especially note the fact in each
instance, when they desire to distinguish it from real or
money wages. I can not but think that this has led
them into some confusion, and prevented them from per-
ceiving several of the implications of their argument. I
must confess I am unable in places to understand exactly
what they mean by " wages," and to such extent, that I
find it difficult to criticise their doctrines before defining
what I understand and mean to express by the three
terms " proportional, real, and money wages."
114 CAPITAL AND POPULATION.
Proportional wages, then, I understand, or, rather as
the term is mj own, I define to be, the proportion of the
product received as wages by the laborer or laborers who
produced it, after a deduction from such product is made
for rent and for the profits of any fixed capital employed.
If any material enter into the product not produced by
the laborers, whose proportional wages are under consid-
eration, its cost and the profit thereon are also to be first
deducted. After rent, raw produce, and the use of fixed
capital are paid for, the proportion in which what re-
mains is divided between the laborers and the owners of
the active stock determines this rate of wages and the
rate of profit. It is not, as might at first be supposed, as
owners of dead stock also that the share of capitalists
must be computed ; the motive of their engaging in pro-
duction includes, indeed, the profit on dead as well as on
active stock. If the rate of profit on the entire capital
expended as wages, and in holding their goods for a
market, is insufficient, they will not produce. But the
profit on dead stock must here be considered as equiva-
lent to a profit on fixed capital, and as not affecting the
computation of the rate of proportional wages. To illus-
trate, we will suppose two capitalists, one of whom pro-
duces wheat and the other wine, and that the wheat can
be sold within the year, while the wine can not find a
market under two years. It is clear that the larger profits
of the wine-grower should not be considered as lowering
the proportional wages of his employes or the rate of
profit he obtains. During the last year it is kept, the
wine may be fairly considered, for the purposes of this
discussion, as fixed, not circulating capital. The propor-
tion of the product which goes to capital varies, of
course, according to the amount of capital employed, as
WAGES AND PROFITS. 115
well as with the rate of profit obtained. "What deter-
mines the rate of wages, however, is not the amount, but
simply the rate of profit. We do not mean, therefore, by
" proportional " that the proportion is between the wages-
fund and the gross product. Such proportion can vary
indefinitely as machinery is substituted for manual exer-
tion, or as the normal amount of dead stock is increased
without disturbing the "cost of labor" to the capitalist,
or the reward of labor to his employes. But, while not
affecting the computation of the rate of proportional
wages, the amount of profit on fixed capital and dead stock
profoundly affects the tendency to a rise or fall of such
wages ? Capitahsts do not ordinarily distinguish in their
calculations between such profits and those they receive
on their expenditure for wages, nor, indeed, need they,
as they never vary in their comparative rate to any ap-
preciable amount. If the general rate of profit is low,
proportional wages will be high, with a tendency to de-
crease ; if it is high, such wages will be low, with a ten-
dency to increase.
The amount of dead stock in existence does, however
— proportional wages remaining the same — considerably
affect real wages, when such dead stock is partly com-
posed of things that laborers are accustomed to consume.
The rate of profit remaining the same, the larger the
amount of such things in existence, the higher will be the
price in proportion to the money-wages that the laborer
must pay for them, and the smaller the amount of such
things he is able to consume. The laborer's interests are,
therefore, subserved by any policy or event which de-
creases the normal amount of dead stock, at least so far
as it consists of articles he consumes.
It is customary for economists to assert indifferently
116 CAPITAL AND POPULATION.
tliat the rate of wages depends on the ratio of capital to
population, and on the demand and supply of labor.
They consider the two to be equivalent propositions. If
they mean, as the exigencies of their argument demand,
proportional wages, they are right as to the former, but
wrong as to the latter proposition, and the two proposi-
tions are the opposite of equivalent. When the ratio of
capital to population is the largest, is exactly the time
when the demand for labor is the least. The demand
does not depend upon the amount of commodities physic-
ally available for the wages-fund, but upon the amount
that can be employed with a profit as active stock. This
amount, we have seen, varies inversely with the amount
of circulating capital in gross, and we have the apparent
anornaly that the exchangeable value of labor, unlike
that of other commodities, is highest when the demand
for it is least, the supply remaining, by supposition, the
same. The explanation lies in the fact, that such a state
of affairs depresses the exchangeable value of the com-
modities in which wages are really paid, more than it de-
presses the exchangeable value of labor, and, value being
a relative term, the value of labor as compared with such
commodities is enhanced. If any commodity be an ex-
ception to the increase of the ratio of capital to popula-
tion, the exchangeable value of both labor and the other
commodities (food, clothing, etc.), in which labor is really
paid, will fall as compared with it. If they fall equally
and the commodity be gold, the money rate of wages
will decline, but not the proportional rate. "When any
material commodity is relatively in excess, its exchange-
able value is lessened, because the commodities with
which it exchanges are not relatively superabundant.
But when the supply of labor exceeds the demand it does
WAGES AND PROFITS. 117
SO only because the supply of the things for which it is
exchangeable are in excess to a greater degree. Its ex-
changeable value, therefore, can not be decreased, but
must be enhanced by any decrease in the demand for la-
bor coincident with and caused by an increase in the
ratio of capital to population.
The rate of wages does not depend upon the demand
for labor, but the demand depends upon it. The ten-
dency to a rise or fall of the rate does indeed depend
upon the extent of the demand, but such influence can.
only become operative when the demand has first changed,
by its effect upon production and accumulation, the ratio
of capital to population. What does directly depend
upon the demand for labor is the amount of employment,
the number of laborers that can be kept at work ; while
the rate of proportional wages depends solely on the ratio
of capital to population.
The efiiciency of labor has nothing to do with the
rate of proportional wages, nor has the margin of cultiva-
tion. Proportional wages are equal whenever the rate
of profit is the same, whether or not it takes in one place
one hundred laborers to produce the same amount of com-
modities that fifty produce elsewhere. I^either has the
price of labor anything to do with the rate. A rise in
real or money wages may or may not be a rise in propor-
tional, but a rise in proportional, or in money wages, other
things remaining the same, necessarily entails a fall in real
wages, as we shall now see in proceeding to a considera-
tion of the latter.
The rate of real wages can be ascertained by dividing
the amount of the wages-fund by the whole number of
laborers, not by the number only of those employed.
The latter division would ascertain for us what is popu-
118 CAPITAL AND POPULATION.
larlj called the " going " rate of wages, and that name
for them will do as well as any other, as what such rate
is does not much affect the principles or deductions of
the science. In defining real wages, Mill says, in Book
II, chapter xxvi, section 1 :
" What is here meant, however, by wages, is the laborer's real
scale of comfort ; the quantity he obtains of the things which nature
or habit has made necessary or agreeable to him ; wages, in the
sense in which they are of importance to the receiver."
And in the preceding paragraph he affirms that such
" wages depend on the ratio between population and capital ; and
would do so if all the capital in the world were the property of one
association, or if the capitalists among whom it is shared maintained
each an establishment for the production of every article consumed
in the community, exchange of commodities having no existence.
As the ratio between capital and population, in all old countries,
depends on the strength of the checks by which the too rapid in-
crease of population is restrained, it may be said, popularly speak-
ing, that wages depend on the checks to population ; that when the
check is not death, by starvation or disease, wages depend on the
prudence of the laboring people; and that w^ages in any country
are habitually at the lowest rate to which in that country the
laborer will suffer them to be depressed rather than put a restraint
upon multiplication."
This definition I accept : the affirmation I have re-
peatedly shown to be true inversely, and in a sense di-
rectly the reverse of Mill's.
Other things being equal, the rate of real and propor-
tional wages varies inversely, though not in strict propor-
tion. A rise in the latter always entails a loss of employ-
ment, which usually more than offsets to the laborer the
benefit of the rise : a rise of two per cent would proba-
bly be followed by a decrease of ten or twenty per cent
WAGES AND PEOFITS. 119
in the number of laborers employed. (I am speaking
now of tbe temporary rise that occurs periodically in the
fluctuations of trade, and not of the decrease in what may
be called the normal rate of profit that proceeds with the
growth and civilisation of a country. This decline of the
normal rate does not lead to any cessation of industry.
Capitalists, being as well satisfied with the smaller rate
as they were before with the larger, are equally willing
to employ their funds productively.) There is no neces-
sary ratio between the rise in proportional and the fall in
real wages. Such rise may entail a slight and lasting or
a severe and transient cessation of employment, which,
when it occurs, will depend upon various causes, many of
which may be accidental, and not due to the action of
economic law ; unless, however, the economic conditions
are disturbed by abnormal causes, such, for instance, as
the occurrence of war, the detriment to the laborer
through the decrease of employment must be many times
the advantage gained by the rise of his proportional
wages. It must be so by about the amount that pro-
ductive consumption is decreased during the period of
lessened production.
Although, in his main argument. Mill constantly af-
firms that " wages " and the rate of profit vary inversely,
he qualifies the statement, in the succeeding quotation
from him, by substituting the term " cost of labor " for
" wages " :
"We thus arrive at the conclusion of Ricardo and others, that
the rate of profits depends on wages; rising as wages fall, and fall-
ing as wages rise. In adopting, however, this doctrine, I must in-
sist upon making a most necessary alteration in its wording. Instead
of saying that profits depend on wages, let ns say (what Ricardo
really meant) that they depend on the cost of labor.
G
120 CAPITAL AND POPULATION.
""Wages and the cost of labor — what labor brings in to the
laborer, and what it costs to the capitalists — are ideas quite distinct,
and which it is of the utmost importance to keep so. For this pur-
pose it is essential not to designate them, as is almost always done,
by the same name. Wages in public discussions, both oral and
printed, being looked upon from the point of view of the payers,
much oftener than from that of the receivers, nothing is more com-
mon than to say that wages are high or low, meaning only that the
cost of labor is high or low. The reverse of this would be oftener
the truth ; the cost of labor is frequently at its highest where wages
are lowest. This may arise from two causes. In the first place,
the labor, though cheap, may be inefl&cient. In no European coun-
try are wages so low as they are (or, at least, were) in Ireland ; the
remuneration of an agricultural laborer in the west of Ireland not
being more tlian half the wages of even the lowest-paid Englishman,
the Dorsetshire laborer. But if, from inferior skill and industry,
two days' labor of an Irishman accomplished no more work than an
English laborer performed in one, the Irishman's labor cost as much
as the Englishman's, though it brought in so much less to himself.
The capitalist's profit is determined by the former of these two
things, not by the latter. That a difference to this extent really
existed in the efficiency of the labor, is proved not only by abundant
testimony, but by the fact that, notwithstanding the lowness of
wages, profits of capital are not understood to have been higher in
Ireland than in England.
" The other cause which renders wages and the cost of labor no
real criteria of one another is the varying costliness of the articles
which the laborer consumes. If these are cheap, wages, in the
sense which is of importance to the laborer, may be high, and yet
the cost of labor may be low ; if dear, the laborer may be wretch-
edly off, though his labor may cost much to the capitalist. This last
is the condition of a country overpeopled in relation to its land ; in
which, food being dear, the poorness of the laborer's real reward
does not prevent labor from costing much to the purchaser, and low
wages and low profits coexist. The opposite case is exemplified in
the United States of America. The laborer there enjoys a greater
abundance of comforts than in any other country of the world, ex-
cept some of the newest colonies ; but, owing to the cheap price at
which these comforts can be obtained (combined with the great
WAGES AND PROFITS. 121
efficiency of the labor), the cost of labor is, at least, not higher, nor
the rate of profit lower, than in Europe.
" The cost of labor, then, is, in the language of mathematics, a
function of three variables : the efficiency of labor ; the wages of
labor (meaning thereby the real reward of the laborer); and the
greater or less cost at which the articles composing that real reward
can be produced or procured. It is plain that the cost of labor to
the capitalist must be influenced by each of these three circum-
stances, and by no others. These, therefore, are also the circum-
stances which determine the rate of profit ; and it can not be in any
way affected, except through one or the other of them. If labor
generally became more efficient, without being more highly reward-
ed ; if, without its becoming less efficient, its remuneration fell, no
increase taking place in the cost of the articles composing that re-
muneration ; or, if those articles became less costly, without the labor-
er's obtaining more of them — in any one of these three cases, profits
would rise. If, on the contrary, labor became less efficient (as it
might do from diminished bodily vigor in the people, destruction of
fixed capital, or deteriorated education) ; or, if the laborer obtained a
higher remuneration, without any increased cheapness in the things
composing it ; or if, without his obtaining more, that which he did
obtain became more costly — profits, in all these cases, would suf-
fer a diminution. And there is no other combination of circum-
stances in which the general rate of profit of a country, in all em-
ployments indifferently, can either fall or rise." — (Mill, Book II,
chapter xv, section 7.)
The proportion between real and proportional wages,
besides the effect of their tendency to vary inversely, is
also affected by the margin of cultivation ; the physical
efficiency of the laborers — their education or mental effi-
ciency — any social custom, or other cause, which prevents
a part of their number from finding employment, and
the degree of skill demanded by the nature of the na-
tional industries.
As, in the quotation above, Mill and Ricardo uniformly
assume that real and proportional wages only differ from
122 CAPITAL AND POPULATION.
the first three of these causes, the latter two they seem
to have overlooked, while thej certainly, hj implication,
deny what I have endeavored to establish as the greatest
difference between them — the tendency to vary inversely
through the effect upon the amount of employment of a
rise or fall of the rate of profit. This last cause of differ-
ence has received enough of our attention, and nothing in
this connection calls for any further remarks upon the
effect of the margin of cultivation, or of the physical or
mental efficiency of the laborers, except to notice in
passing, that the margin of cultivation is by far the most
important determinant of the rate of real wages; the
other two remaining causes are, however, of great mo-
ment, especially as affecting subjects to be hereafter
considered, and because they have so generally been
ignored.
I would remark, then, that anything which prevents
those debarred, by physical or mental disability, or by sex,
from seeking or finding general employment, from seek-
ing or finding the special employment, for w^hich they
are fitted, lowers the rate of real wages as compared with
proportional, and is a deduction from the comforts and
subsistence of the laboring classes, exactly equal to what
such persons would earn if employed, or rather to what
those whose places they took would earn if employed, as
they would necessarily very soon be, since the increase in
the number of laborers, involved in such change of em-
ployment, could not but affect favorably the rate of profit,
and correspondingly enlarge the demand for labor. But
that they should be engaged productively is likewise to
the advantage of the capitalist, because it increases the
normal ratio which capital can bear to population without
increasing the population itself. The additional produe-
WAGES AND PROFITS. 123
tion that wo aid then take place would allow of further
accumulation by the rich, sufficient to employ such labor,
without lowering the rate of profit at all. It is the in-
terest of employer and employe alike that all their fel-
low-citizens should be engaged productively. We suffer,
perhaps, from no greater economic evil than the social
custom which discourages one half the human family —
the female sex — from engaging in productive employ-
ment, and condemns them almost entirely to unproduc-
tive services, or an idle dependence upon producers, as a
means of support. Nature has, indeed, apportioned the
household duties to the wives, mothers, and daughters,
and these duties are necessarily of the nature of services,
and not productive ; but the demand for these services
does not happen to be sufficient to employ the whole or
nearly the whole sex, and the labor of those not needed
should be productively engaged. If it were, it is not too
much to assert that the annual produce of the country
would be increased at least ten to fifteen per cent, and
such increase would be a pure addition to net as well as
gross income. But another economic effect would follow
of incalculable importance to the future of the race. The
tendency of population to press upon the food-supply
would certainly be lessened and probably obliterated by
it. The great addition to income involved would not only
be mainly devoted to a rise in the standard of living,
but the opportunity of self-support would remove the
necessity of matrimony to women as the only alternative
by which they can hope to escape starvation or depend-
ence. Besides which, marriage between young men and
women, productively employed, would involve a positive
decrease of their joint income, that could not fail of
acting as a preventive to unwise unions. Political econ-
124 CAPITAL AND POPULATION.
omy has been named " the dismal science," for no other
reason than the seeming impossibility of applying really
efficient preventive checks to the too rapid increase of
population, that are not also subversive of the best social
instincts of the race. But here is a check probably of
itself sufficient, that will accord with and not antagonize
personal inclination.
If, then, the proper aim of government is the good of
the whole, women have a right to claim, while debarred
by social custom from other employments, the exclusive
appointment to every office the duties of which are not
inconsistent with their physical organization or moral deli-
cacy, even in cases where their efficiency is so inferior to
that of men as to involve a considerable additional ex-
pense to the government. Such a national policy, once
established, would also encourage the employment of
female labor by private individuals, with the effect of
considerably increasing the national prosperity.
But the policy of government providing a stimulus
to the employment of female labor also affects the ques-
tion of free trade and protection. Most of our protected
industries, especially the manufacture of textile fabrics,
employ large numbers of women and girls, who would
not otherwise be productively employed at all in the
agricultural or household pursuits from which our pro-
tective policy has diverted them. The value of this labor
— and it is certainly not less than fifty per cent of that
employed in our cotton, woolen, and silk mills — is to be
offset against any loss in the efficiency of our labor from
what it would have been under free trade, before any
decrease in the productive capacity of the nation can be
attributed to protection.
The following passage from Mill, in a note to Book I,
WAGES AND PROFITS. 125
chapter v, section 1, fuUj sustains in principle the posi-
tion here taken :
"An exception must be admitted when the industry created or
upheld by the restrictive law belongs to the class of what are called
domestic manufactures. These being carried on by persons already
fed — by laboring families, in the intervals of other employment—
no transfer of capital to the occupation is necessary to its being un-
dertaken, beyond the value of the materials and tools, which is
often inconsiderable. If, therefore, a protecting duty causes this
occupation to be carried on, when it otherwise would not, there is
in this case a real increase of the production of the country."
This leads us to make the same remark of the remain-
ing cause of difference between real and proportional
wages. Any increase of skill required of the laborer, by
a change in the nature of his trade, is a direct benefit to
the laboring classes, as it raises some of their number to
a higher social status, in which thej are able to raise the
average rate of real, without any increase of proportional,
wages. The skill required of artisans and the rate of
real wages that they receive are on the average, in every
land, decidedly greater than the skill demanded of and
the real wages accorded to agricultural laborers. What-
ever this addition to real wages, due to protection, may
be, it is also to be offset against any losses due to the
same cause. The gain is considerable, but not equal to
that of the employment of female labor. It may, per-
haps, be estimated at from ten to fifteen per cent of the
male labor diverted from agriculture to manufactures.
It is important to notice that both these gains, what-
ever they are, accrue mainly to the benefit of labor, and
do not add to the rate of profits, or to its gross amount,
except as they allow of more capital being accumulated
and profitably employed, and that they find no expression
126 CAPITAL AND POPULATION.
in the prices at whicli international exchanges take place.
If, in all countries, journeymen watch-makers earned in a
day five times as much as common laborers, and it took
ten days' labor to make a watch, a country, in which the
margin of cultivation was such that the wages of common
labor was one dollar per day, could produce a watch for
fifty dollars, while a more fertile and less peopled land,
where labor was worth one dollar and a half per day,
could not produce the watch under seventy-five dollars.
Under free trade, the latter would buy watches of its less
fertile and overpeopled neighbor, and would apparently
save twenty-five dollars on each watch by so doing;
whereas the apparent gain of its neighbor would be only
^ve dollars, that being by supposition the difference be-
tween the productive efiiciency of ten days' agricultural
labor in the respective countries. Supposing the efiiciency
of artisan labor to be the same in each country, the joint
gain of the interchange would only be that resulting
from the fertile soil of the one being cultivated in place
of the more sterile soil of the other. This gain amounts
to ^ve dollars, and is the identical five dollars gained by
the watch-making nation ; whereas the twenty-five-dollar
gain to the agricultural nation is only apparent, being
under protection a mere transfer from the consumer to
the skilled artisan.
By diverting ten days' labor from agriculture to the
better-paid watch-making, the over-populated country
has gained a value of forty dollars. By a like diversion,
which could, however, only take place under protection,
the under-populated country would increase the value of
its products to the extent of sixty dollars ; twenty-five of
them, however, being at the expense of its own consum-
ers, its net gain would be only thirty-five. In such case
WAGES AND PROFITS. 127
protection would result in a loss to the world of five dol-
lars, but also to such a redistribution of wealth as would
result in a net gain to the protected country of thirty-five
dollars, and a net loss to its manufacturing neighbor of
forty. In my illustration, I have supposed that the ratio
of skilled to common wages was the same in both places.
This, however, except for convenience of calculation,
makes no difference, as long as, in both places, there is
some distinction made in favor of skilled labor. The
expense of educating the laborers to their higher condi-
tion of life is also, of course, to be deducted from the
net gain of thirty-five dollars.*
* " Although, however, general wages, whether high or low, do not affect
values, yet if wages are higher in one employment than another, or if they
rise or fall permanently in one employment without doing so in others,
these inequalities do really operate upon values. The causes which make
wages vary from one employment to another have been considered in a
former chapter. When the wages of an employment permanently exceed
the average rate, the value of the thing produced will, in the same degree,
exceed the standard determined by mere quantity of labor. Things, for
example, which arc made by skilled labor, exchange for the produce of a
much greater quantity of unskilled labor ; for no reason but because the
labor is more highly paid. If, through the extension of education, the la-
borers competent to skilled employments were so increased in number as to
diminish the difference between their wages and those of common labor, all
things produced by labor of the superior kind would fall in value, compared
with things produced by common labor, and these might be said, therefore,
to rise in value. We have before remarked that the difficulty of passing
from one class of employments to a class greatly superior has hitherto
caused the wages of all those classes of laborers who are separated from
one another by any very marked barrier to depend more than might be
supposed upon the increase of the population of each class, considered sep-
arately ; and that the inequalities in the remuneration of labor are much
greater than could exist if the competition of the laboring people generally
could be brought practically to bear on each particular employment.
" It thus appears that the maxim laid down by some of the best polit-
ical economists, that wages do not enter into value, is expressed with greater
128 CAPITAL AND POPULATION.
The consideration of money -wages need not detain
lis long. Their rate is evidently ascertained by dividing
the money value of the vrages-fund by the number of
laborers employed. That of real wages is determined by
the ratio of the utility of the wages - fund to the whole
number of laborers, while the rate of proportional wages
is, strictly speaking, not a rate of wages at all, but is the
ratio of the wages-fund itself to the gross product after
rental and the use of fixed capital are paid for. The
consideration of money-wages is chiefly of interest, be-
cause it is through change in them that changes in the
others are effected. It is at present sufficient for my
purpose to say that a general rise in money-wages, other
money values remaining the same, or, in other words, a
latitude than the truth warrants, or than accords with their own meaning.
Wages do enter into value. The relative wages of the labor necessary for
producing different commodities affect their value Just as much as the rela-
tive quantities of labor. It is true, the absolute wages paid have no effect
upon values ; but neither has the absolute quantity of labor. If that were
to vary simultaneously and equally in all commodities, values would not be
affected. If, for instance, the general efficiency of all labor were increased,
80 that all things without exception could be produced in the same quantity
as before with a smaller amount of labor, no trace of this general diminu-
tion of cost of production would show itself in the values of commodities.
Any change which might take place in them would only represent the un-
equal degrees in which the improvement affected different things; and
would consist in cheapening those in which the saving of labor had been the
greatest, while those in which there had been some, but a less saving of labor,
would actually rise in value. In strictness, therefore, wages of labor have
as much to do with value as quantity of labor ; and neither Ricardo nor any
one else has denied the fact. In considering, however, the causes of varia-
tion in value, quantity of labor is the thing of chief importance ; for, when
that varies, it is generally in one or a few commodities at a time, but the
variations of wages (except passing fluctuations) are usually general, and
have no considerable effect on value." — (Mill, Book III, chapter iv, sec-
tion 3.)
WAGES AND PROFITS. 129
relative rise, results always in a rise of proportional and
a fall in real wages, through cessation of employment.
It may be well, in closing this chapter, to remark that
the result of the discussion as to whether such a fund as
the wages-fund really exists will not affect the argument.
All that is implied by the term, as I have used it, could
have been as well expressed by the term " gross amount
of wages." To my mind, it seems evident that past and
present social and economic conditions do accurately pre-
determine the amount that will be expended in wages, to
such degree that the amount of that fund may be strictly
considered as set apart ; but, if by predetermination it is
meant that the amount of the wages-fund is predeter-
mined by the intentions of capitalists, I do not view it as
governed by such intentions, except to a very slight and
temporary amount.
CHAPTEK yill.
CAPITAL AND LABOE.
The consideration that we have just given to wages
will enable ns to appreciate better the true relations of
capital and labor.
' The interest of the laborer lies solely in the rate of
his real wages, and any change in proportional or in
money wages is a matter of indifference to him, except
as such change affects the rate of real. The sole interest
of the capitalist, however, is that the rate of proportional
wages should be low, and he has no economic concern
with real or money wages, except as they affect propor-
tional.
It has been commonly assumed that, while capitalists
and laborers were both interested that the gross annual
produce should be as large as possible, their interests
were antagonistic when it came to a division of the
spoils, and that any increase in the share of one class
could only be at the expense of a decrease, not only of
the relative but of the absolute share of the other.
Now, this is true as far as individuals actually engaged
in production divide a certain fixed product, but not true
of the absolute share of either class as a whole, because
there is a division of present products that by leading to
an increase of future products increases the absolute share
CAPITAL AND LABOR. 131
of each class, though not, of course, the relative share of
one or the other of them. It can not, indeed, be assert-
ed that the points at which the absolute share of each
will be the greatest always coincide exactly, but the
points are evidently very near together — so near, that
the attainment of one will practically be the attainment
of the other also.
In any given society, it is the interest of the capital-
ists that capital should bear such a ratio to population, as
that the sum arrived at by multiplying the gross capital
by the rate of profit, which normally results from such
ratio, shall be the greatest. Any increase of capital, be-
yond that amount, will augment the gross sum on which
profit is attained, but lessen the rate — any decrease will
augment the rate, and lessen the gross sum ; but in either
event the gross income derived from profits will be de-
creased. The interest of the laborer will likewise be
subserved when capital bears such a ratio to population
that the sum arrived at by multiplying the number of
laborers employed by the average rate of their propor-
tional wages, or, in other words, the total wages-fund,
shall be the greatest. Any increase of capital, beyond
that amount, wiU augment the rate, but decrease the
number employed; and any decrease will augment the
number, but decrease the rate ; and in either event the
gross income from wages will be lessened. The inter-
ests of both classes are therefore identical in the increase
of the gross product, and very nearly, if not quite, iden-
tical in its division also, because the ratio of capital to
population ultimately depends upon such division.
But, as I have before remarked, the interests of indi-
yidaals do not coincide with the interests of the classes
to which they belong. Every employer will grow richer
132 CAPITAL AND POPULATION.
bj paying low wages, and every laborer by exacting high
ones, at least as compared with their fellow employers
and employes. We have here a case in which individ-
ual are opposed to social interests. The antagonism be-
tween labor and capital results wholly from the growth of
class out of individual animosities. It subserves the in-
terest of every employer that other capitalists should pay
higher wages than he does, and the interest of every la-
borer that other laborers should work for lower wages
than his own. The individual interest of each is really
coincident with that of the class to which he does not be-
long. When this is recognized, and not before, may we
expect the two classes to harmonize in their feelings and
actions.
While the ratio of capital to population that yields the
greatest income to capital may not always be identical
with that which yields the greatest income to labor, it is
evident that the ratio which leads to the greatest annual
production subserves best the interest of the community,
and that political and social action should, as far as pos-
sible, be directed to secure such ratio, with a leaning, per-
haps, to the interests of labor from humane but not from
economic motives.
The real interest of the laboring classes is in real
wages, and this interest can be advanced : First, by in-
creasing their own efficiency by a more faithful and in-
dustrious performance of their duties. As they receive
much the greater part of the gross produce, they them-
selves suffer the greater part of the loss resulting from
laziness and inefficiency. The immediate loss, indeed,
falls upon their employers, but they distribute this among
the consumers of their goods by enhancing their price,
and the laborers themselves suffer it ultimately as such
CAPITAL AND LABOR. 133
consumers. Secondly, by any change in the nature of
the national industries, by which more of the class are
raised from the position of common laborers to that of
skilled artisans. Thirdly, by increasing the proportion
of their own number who enter the labor market as com-
petitors for employment. I refer here chiefly to the em-
ployment to a greater extent of female labor. Fourthly
and lastly, by never seeking to raise their proportional
wages to a point that will allow capital such scant remu-
neration as will lead to a decline of production.
Owing to the conflict between individual and social
or class interests, to which I have abeady adverted, the
class action of laborers, as it has expressed itself in trades-
unions, has been diametrically opposed to their true in-
terests as here ascertained. First, they have endeavored
to lessen their own efl&ciency in production. Secondly,
their action has tended to discourage any change in the
nature of industry in the direction of substituting skilled
for common labor, because it is in skilled industries alone
that they are able to combine effectually enough to influ-
ence at all the rate of profit and the expense of conduct-
ing such industries ; besides which, in such industries, by
enforcing the occasional idleness of fixed capital, they
augment in them the amount of capital that is necessary,
and thus lessen not only the absolute but the relative
share of the produce that accrues to themselves. Third-
ly, they have failed to demand, as their moral and polit-
ical right, the greater employment of female and prison
labor ; and, fourthly, they have persistently endeavored
to raise the rate of proportional wages beyond the point
that allowed of such a rate of profit as was consistent
with the highest rate of real wages.
Their whole action has been directed, not only toward
134: CAPITAL AND POPULATION.
the lessening of the gross sum, of which they obtain a
part, but to the reduction against themselves of the ratio
in which that sum is divided between capital and labor.
They have succeeded in reducing, not only their absolute
but in some degree their relative share ; for this mistaken
action they can not be blamed, if real and proportional
wages coincide to the degree taught by English econo-
mists, and if over-accumulation is really not antagonistic
to their employment in production. If I am wrong, their
action is, in the main, right, and little improvement in
their condition can be hoped for ; but, if I am correct, it
lies in the power of the laboring classes to nearly or quite
double their real, without increasing in the least the rate
of their proportional wages. The truer perception of the
real relations of capital and labor, acquired by the recog-
nition of the constant tendency of capital to press upon
population, affords the only solution of the labor question,
w^ith its resulting problems of socialism and revolution.
The condition of our laboring classes is very unsatisfac-
tory, and daily becoming more so, " where wealth accu-
mulates and men decay." They have a right to demand
such social reorganization as shall give them a far greater
absolute, though not relative, share of the earth's prod-
ucts than they now receive ; and that this can, in a meas-
ure, be done, not only not to the detriment, but to the
positive advantage of capital, I have certainly made evi-
dent.
I must confess myself somewhat surprised at the fol-
lowing passage from Mill's work. Book Y, chapter x, sec-
tion 5 :
" If it were possible for the working classes, by combining
among themselves, to raise or keep up the general rate of wages, it
need hardly be said that this would be a thing not to be punished, but
CAPITAL AND LABOE. 135
to be welcomed and rejoiced at. Unfortunately, the effect is quite
beyond attainment by such means. The multitudes who compose
the working class are too numerous and too widely scattered to com-
bine at all, much more to combine effectually. If they could do so,
they might doubtless succeed in diminishing the hours of labor, and
obtaining the same wages for less work. But if they aim at obtain-
ing actually higher wages than the rate fixed by demand and supply —
the rate which distributes the whole circulating capital of the coun-
try among the entire working population — this could only be accom-
plished by keeping a part of their number permanently out of em-
ployment. As support from public charity would of course be
refused to those who could get work and would not accept it, they
would be thrown for support upon the trades-union of which they
were members; and the work-people, collectively, would be no
better off than before, having to support the same numbers out of
tlie same aggregate wages. In this way, however, the class would
have its attention forcibly drawn to the effect of a superfluity of
numbers, and to the necessity, if they would have high wages, of
proportioning the supply of labor to the demand." ,
No passage more fertile than tliis in economic errors
was ever penned, and an analysis of it will therefore
serve admirably to exemplify the difference between
Mill's views and my own.
If, by combining, he means to assert that the laborers
might be able to retain the same rate of proportional
wages while shortening the hours of labor, I reply that,
while this is technically true, it is not true in the sense
that Mill intends. Even if the proportion between the
number of laborers employed and the amount of the wages-
fund might be maintained, the employment of a relatively
larger active fixed capital wonld be necessary — the same
amount of buildings, tools, and machinery being required
for short as for long hours ; but such proportion would
not be maintained, on account of the fall in profits.
Labor, therefore, would receive a relatively smaller share
136 CAPITAL AND POPULATION.
of a relatively smaller produce, unless, indeed, more work
was accomplished in the short than in the long hours.
Such a combination, if successful, could not fail to greatly
depress the rate of real wages as compared with propor-
tional, and is reprehensible in its effects upon both labor
and capital, and especially so in its effect upon the labor-
ers themselves, though it is not a proper subject for legis-
lative repression. Mill here affirms by implication that
real and proportional wages are not differently affected by
the efficiency of labor, although he has elsewhere pointed
out that they are. Assuming also, contrary to his own
definition of circulating capital, that it is all at once dis-
tributed among laborers, he seems to suppose that the
amount so distributed will depend, not upon the sup-
posed value of what will be produced, but upon the
amount of past accumulation.
He then goes on to say, " But if they aimed at ob-
taining actually higher wages than the rate fixed by de-
mand and supply — the rate which distributes the whole cir-
culating capital of the country among the entire working
population — this could only be accomplished by keeping
a part of their number out of employment." But there
is no rate at all determined by " the whole circulating
capital " as one of its factors. And there is, further, no
rate, either of proportional, real, or money wages depend-
ent directly upon the demand for labor, because the cause
of any change in demand for labor is itself a corre-
sponding change in the ratio of the demand and supply of
the commodities for which labor is exchanged. Curtail-
ment in the amount of employment does, indeed, follow
any rise of proportional wages, but it is not on account of
the insufficiency of circulating capital, physically available
for wages, but because such rise can only be at the ex-
CAPITAL AND LABOR. 137
pense of profits, the hope of which is the sole induce-
ment to employ labor.
There is, however, one trivial exception to the re-
marks I have made, which it will be well to note, al-
though neither theoretically nor practically of much im-
portance.
In Book Y, chapter x, section 5, of Mill's work, I find
the passage :
" Combinations to keep up wages are sometimes successful, in
trades where the work-people are few in number, and collected in
a small number of local centers. It is questionable if combinations
ever had the smallest effect on the permanent remuneration of
spinners or weavers; but the journeymen type-founders, by a close
combination, are able, it is said, to keep up a rate of wages much
beyond that which is usual in employments of equal hardness and
skill ; and even the tailors, a much more numerous class, are under-
stood to have had, to some extent, a similar success. A rise of
wages, thus confined to particular employments, is not (like a rise
of general wages) defrayed from profits, but raises the value and
price of the particular article, and falls on the consumer."
It is evident that when, in any particular trade, the
rate of money- wages is raised by trades-unions, there is no
rise of proportional wages ; for the price of the commodi-
ty produced will soon, if not immediately, also rise enough
to cover the increase in the cost of production ; but there
will result a rise of real wages to the laborers engaged in
the supposed trade, which will be gained by them at the
expense of the consumers of the article produced. In so
far as such article is consumed by the poor, there is no
rise in the average real wages of the class ; but, in so far
as it is consumed by the rich, there is such a rise, and at
the expense, not of profits, but of the rich consumer.
But whether this apparent rise will result in a real gain
to the laboring class wiU depend entirely on the effect of
138 CAPITAL AND POPULATION.
the increased cost of sucLl luxury upon accumulations. If
the same money value is consumed as before, as it then
takes fewer laborers to produce such value, some will be
thrown out of employment, and the gross sum distributed
as wages will be unaffected. If less is consumed and ac-
cumulations are thereby increased, there will be an abso-
lute loss to the wages-fund ; but, if unproductive consump-
tion turns out to be increased, the laborer will gain a per-
manent advance in his real wages. To some small extent
the latter is the ordinary result, and trades-unions have
probably secured to labor some small addition to real
wages in this manner ; but the advantage gained, or that
can be gained, is insignificant, and of very doubtful mo-
rality, consisting as it does in forcing one class to pay
more than another for the same commodity — labor.
CHAPTER IX.
CO-OPEEATION.
Co-operation is undoubtedly the only final solution
of the labor question. Although, as I have shown, both
capital and labor are equally benefited by such division
of the total produce as results in such total being the
largest, and that either class loses and does not gain by
securing for itself any larger proportion, the actions of
the individuals composing each class will not, naturally,
conduce to such fair and desirable division. The conflict
between individual and social interest can only cease
when each individual receives profits as well as wages.
We are not here concerned with the moral and industrial
effects that may be expected to flow from co-operation,
further than to observe that its adoption must materially
increase the efiiciency of labor, but that such benefit can
not be looked for except as the intelligence and morality
of the laboring classes are further evolved. It belongs to
our subject to consider what effect its adoption will have
upon the ratio of capital to population. It is evident
that, when wages and profits go wholly to the same indi-
viduals, a general rise in proportional wages and corre-
sponding decrease in profits will not, as now, at all dis-
courage production. A general glut of material things
will then be impossible, because labor will have ceased to
140 CAPITAL AND POPULATION.
be a commodity. Gaining in wages what lie loses in
profits, the inducement to the producer to go on with
productive consumption will be the same. This removes
the present economic check to over-accumulation. In a
co-operative society excessive accumulations will be no
less useless than they are in ours, but they will not be so
hurtful, because they will not lead to any cessation of
industry. "When they occur, they will entail a loss of con-
sumption alone, and may properly be considered as con-
sumed unproductively, without affording any enjoyment
or satisfaction; and the loss would be similar to that
caused by fire or shipwreck. In such state of society ac-
cumulation would probably proceed almost, if not quite,
to the annihilation of profits, but would not go beyond,
as it is not in human nature to knowingly suffer a greater
present deprivation for a smaller future satisfaction.
The determination of labor and capital to individual
trades may then, as now, be excessive or deficient, with
the result of a fall or rise of real wages and profits to the
producers in them and to the corresponding benefit or
loss of consumers — ^the producers in other trades. But
this will lead only to a change and not to a cessation of
employment.
At present, accumulations not only come almost ex-
clusively from profits, but come in a disproportional de-
gree from large profits. As a rule, the larger an individ-
ual's income, the larger the proportion of it, both relatively
and absolutely, that is saved. The inequality of individual
fortunes has a powerful effect in intensifying the effect-
iveness of the desire to accumulate. Under the present
social state, the wage-receiving class are practically de-
barred from accumulating at all when the accumulations
of the rich are excessive ; the little they lay aside when
CO-OPERATION. 141
the wages-fund is large is pretty certain to be unprodiic-
tivelj consumed when the wages-fund is small, and, as
we have seen, periods when it is small are the certain
effect of over-accumulation by others. The effort by the
rich to be richer than economic law allows, in great meas-
ure prevents the poor from ever becoming possessors of
capital at all, and is the chief reason why the benefits of
our progress in civilization accrue almost wholly to the
fortunate few.
Under co-operation, the inequality of individual fort-
unes will be greatly lessened, and consequently the gross
sum that can be spared and saved from incomes can not
well be so great as at present, and the tendency of capital to
press upon population will be correspondingly decreased.
If the credit system remains after the adoption of co-op-
eration (and it is by no means inconsistent with it), there
will remain some tendency to periodicity in insolvencies,
but such periods will not be accompanied by any cessa-
tion of industrial activity. There will be no loss of pro-
duction, but merely a transfer from lenders to borrowers.
Under complete co-operation, industrial stagnation would
be impossible, but some loss of confidence might occur, as
the result of disproportion in production.
It is, of course, true that the production of commodi-
ties under co-operation might be no better fitted to the
needs of consumers than now, and some cessation, or
rather delay, of exchanges might occur ; but the conse-
quent increase of dead stock could not then, as now, tend
to any decrease in productive consumption, because then,
labor being eliminated as a commodity, the demand and
supply of commodities would be strictly the sum of ma-
terial commodities themselves. The effect would be
that any undue decrease in past unproductive consump-
142 CAPITAL AND POPULATION.
tiou would soon be adjusted by a corresponding increase
in future unproductive consumption, without productive
consumption being either increased or decreased.
This result of co-operation, in doing away with peri-
odic declines in industrial activity, has not, that I am
aware of, been before perceived, nor could it be, until
the economic effects of over-accumulation were recog-
nized ; but it affords a very powerful argument for its
adoption at the earliest practicable moment. The full
result will only be obtained when the change to co-
operation is complete, but the severity of each crisis
will be mitigated with every partial adoption of the
system.
While the ultimate effect of co-operation will be to
do away with the vicissitudes of business, such vicissi-
tudes, while they remain, operate against co-operation in
its competition with the present system. The propor-
tional wages and profits combined of the individual co-op-
perative laborer are the same in good and in bad times,
and his remuneration only varies as the proportion of the
commodities he produces is greater or less than the
amount of the commodities the community offers in ex-
change for them ; but the amount of employment in his
trade varies with that in those trades where the product
is divided, in so far at least as such products are ex-
changed for each other. The little accumulations, there-
fore, of co-operative laborers are apt to be swept away
during periods of stagnation, and the co-operative enter-
prise destroyed through no fault of the operatives them-
selves, but as the result of economic causes resulting from
the faults of the competing system. This, together with
the present moral and intellectual status of the laboring
classes, renders the establishment of any co-operative en-
CO-OPERATIOX. 143
terprise very difficult, and it is, perhaps, too soon as yet
to hope for any immediate success, save in exceptional
circumstances ; nevertheless, the system should be kept
in view, as the great and ultimate goal of political en-
deavor, and as the only panacea for many of our social
and economic evils.
7
CHAPTER X.
FREE TRADE AND PROTECTION.
The argument in favor of free trade is an exceed-
ingly simple one — so simple, that we can not wonder at
the contempt felt for the intellectual capacity of those
writers who fail to comprehend it. To state it, I can
not do better than to use the words of Mill, in Book III,
chapter xvii, section 3, in which he says :
"We perceive la what consists the benefit of international
exchange, or, in other words, foreign commerce. Setting aside its
enabling countries to obtain commodities which they could not
themselves produce at all, its advantage consists in a more efficient
employment of the productive forces of the world. If two coun-
tries which trade together attempted, as far as was physically pos-
sible, to produce for themselves what they now import from one
another, the labor and capital of the two countries would not be so
productive, the two together would not obtain from their industry
so great a quantity of commodities as when each employs itself in
producing, both for itself and for the other, the things in which its
labor is relatively most efficient. The addition thus made to the
produce of the two combined constitutes the advantage of the
trade."
To every word of which I cordially subscribe, except
the implication that the " efficiency of labor and capital "
is an equivalent term to the " efficiency of labor " alone.
Any and every restriction upon commerce is undoubtedly
FREE TRADE AND PROTECTION. 145
detrimental to the productive efficiency of the labor of
the world. But, when the question is discussed of the
distribution of the capitalized wealth of the world and of
its annual produce, I take decided issue with the English
school of political economy, and I shall be able to prove
that the free interchange of an agricultural with a manu-
facturing country not only may be, but to a large extent
actually is, detrimental to the former, and that the latter
may not only gain all the benefit of the increased pro-
ductive efficiency, but something besides, which some-
thing is an absolute loss to the agricultural country,
against which it can only protect itself by discriminating
duties.
I must first ask from the reader a consideration of the
inherent differences between the nature of the two great
classes of industry. These differences are :
1. That agriculture can utilize much less capital than
manufactures in em/plpying a given population.
2. That the efficiency of labor is everywhere the same^
or nearly so in manufacturing^ hut very variable in agri-
culture in different States, on account of the latter effi-
ciency depending on the national margin of cultivation.
3. That the efficiency of labor is uniform in manu-
factures, but variable in agriculture as affected by the
vicissitudes of the seasons.
1. That agriculture can utilize much less capital than
^manufactures in employing a given population.
The intelligent reader can hardly have failed to an-
ticipate me in the application here of the principle of the
constant tendency of capital to outstrip population. It
follows, from this principle, that a country will always
possess, very shortly after the need is felt, all the capital
UQ CAPITAL AND POPULATION.
it can employ at a satisfactory rate of profit. The opening
up of any new avenue for investment inevitably results
in an increase of capitalized wealth ; and I have further
shown that such increase of capital, while it is taking
place, is always accompanied by an increase of produc-
tion to several times its own extent, and which contin-
ues until the new normal ratio of capital to population
is attained. This result is the necessary consequence of
the fall in proportional wages and rise in profits that any
and every opportunity for profitable investment afibrds.
The nature of a nation's industries, therefore, as utilizing
more or less capital in proportion to population, is a vital
one to its productive efficiency. This element of national
productiveness has no effect upon its exchange of produce
with its neighbors. Such exchange is wholly governed
by the money-cost at which it and they can produce ; and
into such cost both money- wages and profits enter ; but it
follows, as a result of our whole argument, that, as a ques-
tion of national profit and loss, the comparison should
be simply between the money-cost of the labor that can
produce the commodity at home as compared with the
money-cost of that which produces the articles exchanged
for the imported commodity.
To illustrate, let us suppose that in America a day's
labor on the poorest land will produce wheat of the value
of $1.65, $1.50 of which is paid as wages, and fifteen
cents as the profit of circulating capital, at ten per cent,
and that the product of one's day's labor in manufactur-
ing woolen cloth will sell for $3.15, composed of $1.50
for wages, fifteen cents for profit on circulating capital,
and $1.50 for profit on fixed capital. (For the sake of
simplicity, I here suppose no fixed capital to be employed
in agriculture, or, what will amount to the same thing,
FREE TRADE AND PROTECTIOlSr. I47
the profit, rent, etc., on the plant in woolen manufact-
ure to exceed the profit of the agricultural plant by an
amount equal to the wages expended in either case. The
supposition is, of course, an extravagant one, and only
made for the sake of enforcing the principle.) Let us
likewise suppose that in England one day's labor on the
poorest land will produce two thirds of what it will in
America. Wages will then be one dollar per day, and
the value of the produce will be $1.10. The money-price
of wheat would be the same in each country — as it must
always be — cost of carriage, etc., apart. Cloth, however,
can be made in England, under otherwise similar condi-
tions, for $2.10 for the product of a day's labor, one dol-
lar of which will be wages, ten cents profit on circulating
capital, and one dollar profit on fixed capital. (This is
not exactly the proportion in which English fixed capital
would enter into the price, but it is sufficiently exact for
the purposes of this discussion. It is exact, as far as Eng-
lish labor and profits compose the cost of buildings, tools,
etc., but not as far as raw agricultural products or import-
ed articles enter into such cost ; in fact, the amount of
English fixed capital would be larger than I have stated ;
and such increase, whatever it would be, would entail a
further loss upon America in excess of that shown by the
calculation.) America can not import such cloth for less
than $2.10, and may be forced to pay any price between
$2.10 and $3.15.
In Book Y, chapter x, section 1, Mill says :
" The amount of national loss thus occasioned (by protection) is
measured by the excess of the price at which the commodity is
produced over that at which it could be imported."
According to him, therefore, England gains nothing ;
for, as we shall see hereafter, cost of carriage, profits of
148 CAPITAL AND POPULATION.
importers, etc., apart, prices of agricultural produce must
be the same in all countries carrying on commerce with
each other. Her gain consists entirely in the rise in her
margin of cultivation, caused by her importation of food,
while America's gain on importing the cloth is $1.05, less
the loss occasioned by any lowering of her margin of cul-
tivation. Strictly speaking, the calculation according to
Mill should take no account of the margin of cultivation,
as he omitted to notice its effect upon the distribution of
the gain in productiveness ; as this, however, is probably
only an error of omission on his part, I give him the
benefit of it in my argument.
ISTow, this apparent gain of America is very much
greater than the benefit to the world by an English la-
borer being employed in making cloth instead of raising
wheat, and an American laborer in raising wheat instead
of making cloth. As it takes the same amount of labor
in either country to make the cloth, the gain in the
amount of material products is solely in the increased
efificiency of the labor employed in growing wheat. By
the conditions of our problem this gain is fifty cents on
a day's labor, and, if we accept Mill's method of calcu-
lating, America, under free trade, gains the whole money
advantage of such trade and fifty-five cents besides, while
England also gains a substantial advantage in her margin
of cultivation only partially compensated by a smaller
loss in her margin to America. This result is too absurd
to be for a moment entertained. It is simply the claim
that the parts can be greater than the whole. The fifty
cents gain is divided into a money gain of $1.05, and
that resulting from the disturbance of the two national
margins of cultivation (this last is also a gain because
the rise in the English margin, as a matter of fact, is
FREE TRADE AND PROTECTION". 149
greater tliaii the fall in tlie American, on account of tlie
great amount of our unoccupied fertile lands) ; nor can
the dilemma be escaped by the claim that the extra fifty-
five cents of America's gain is due to the money-cost of
English capital being less than American. That is the
true explanation of the fact, but, as long as there is no
gain in the labor-cost of such capital, its money -cost is
here a matter of indifference. The $1.05, if Mill is
right, should represent a material benefit, and not a mere
difference in money values ; but we have seen that fifty
cents, and the gain through the English margin being
raised more than the American has been depressed, is the
extent of the material benefit to the* world, and this has
now become a gain of $1.05, and the gain in the margins
besides, and free-traders have the further anomaly to ex-
plain, how it happens that agricultural nations, to whom,
according to them, more than the whole gain of com-
merce accrues, remain poor, notwithstanding the greater
fertility of their soil ; while manufacturing nations, who
receive none of it, are the richest nations of the earth,
despite their comparative sterility.
IS'ow, let us consider the problem in consonance with
the views advanced in this treatise. If America pro-
tected her woolen manufacture, as soon as she had ac-
cumulated the requisite capital, she would obtain a day's
product of cloth with the same labor the product of
which she formerly sold to England for $1.65 ; but for
a day's product of English labor she was forced to pay
$2.10 or over. She, therefore, formerly obtained for
herself none of the benefit of the increased productive-
ness of labor, and lost forty-five cents besides, even when
she obtained her cloth at the least possible price. Eng-
land, on the other hand, sold to America the product of
150 CAPITAL AND POPULATION.
a day's labor for $2.10, which would have only brought
her if employed in agriculture a value of $1.10. She
formerly, therefore, gained the whole profit in the inter-
national exchange, and fifty cents besides, forty-five cents
of which was at the expense of America, and five cents
represented the profit saved on the extra circulating capi-
tal necessary to employ an American over an English
laborer, or, in other words, it is the profit on the addi-
tional production of fifty cents. The American con-
sumer does indeed pay $3.15 for an article he could
import for $2.10, but the gross sum of the national
profits is larger by $1.50, and the gross revenue of the
whole people greater by at least forty-five cents, to which
must be added the gain accruing from the consequent
rise in the margin of cuhivation.
Let us now change the supposition, and suppose that
the cost of woolen cloth is composed of profits only to the
extent of one quarter the sum paid the artisans as wages.
The cost of a day's product of cloth in England will then
be $1.35 and its cost at home $2.02f, the rate of profit,
as before, being ten per cent alike in both countries.
America will now gain thirty cents by the interchange of
commodities, and England twenty cents plus the ^ve
cent profit on extra circulating capital, as before.
It would seem at first sight that America, in this case,
gained the greater part of the mutual advantage, but that
is not actually the case ; to really do so, she should gain
nearly the whole, or at least such part of the fifty cents
as represents half the real advantage to the world of her
employing her laborers in agriculture instead of manufact-
ures. Proper allowance must be made for the effect of
free trade upon the margin of cultivation. If England
with her present population was forced to raise all her
FREE TRADE AND PROTECTION". 151
own food, her margin would be so low tliat she would
perhaps produce, with the same amount of labor on her
poorest lands, only half the produce we now get from our
poorest lands. This would add twentj-five cents to her
gain, in the case we have supposed, and make the total
fifty cents, while a subtraction must be made from Amer-
ica's apparent gain of thirty cents, to allow for any low-
ering of her margin, on account of employing more of
her labor in agriculture. If we suppose that, under pro-
tection, on the poorest lands then cultivated, ten per cent
less labor than formerly was required for the same prod-
uce, her real gain under free trade would be only fifteen
cents, while England's would be fifty cents ; the gain to
the world would then be sixty cents, composed of fifty
cents former difference in the efificiency of labor, plus
twenty-five cents the gain of England on the rise of her
margin, and less fifteen cents the loss of America on the
decline of her margin, (The '^yg cents as before repre-
sents the profit on the increased production, and affects
the distribution only, not the creation of wealth.) The
rate of profit in both being the same, and all other things
being equal, a manufacturing country will always gain
the larger proportion of the benefit accruing from trade,
and, if the article be one into the cost of which profits
enter largely, it may appropriate to itself more than the
whole gain, the excess being at the expense of the agri-
cultural. If the normal rate of profit, as is usually the
case, is less in the manufacturing than in the agricultural,
or if the rate in both should be less than the rate we have
supposed, the actual loss to the latter will be lessened, or,
as the case may be, her share of the gain to the world
will be increased, hut it can never quite equal one half
of such gain, I must not be understood as claiming that
152 CAPITAL AND POPULATION.
the element of profit, as affecting cost of production, is
usually great enough of itself alone to justify protective
duties, but only that it lessens very materially the propor-
tion of the benefits of free trade to an agricultural nation
as compared with what would accrue on an equal division
of such benefit, and that, in connection with the effect
upon the margin of cultivation, the employment of other-
wise idle labor, the transmutation of common into skilled
labor, and of effects upon the equation of international
demand, to be hereafter noticed, it will justify protective
duties in most of the instances in which they have been
imposed, if the increase of mere national prosperity be
accepted as such justification.
Whether the importation of any article, the equation
of international demand being even, is actually causing a
gain or loss to the country, can be ascertained pretty ac-
curately by comparing the imported cost of such article
with the lahor-cost of producing it at home, together
with an addition for the profit of circulating capital em-
ployed. From the result obtained allowance must be
made for the effect of protecting or importing the article
upon the margin of cultivation and upon the* employ-
ment of female or other wasted labor, and the substitu-
tion of highly paid skilled for the lowly paid common
labor.
There is no disputing the fact that manufacturing are
uniformly richer in capitalized wealth than agricultural
countries, and that, despite their lower margin of cultiva-
tion, their annual produce is nearly, if not quite, as large
jper capita. That of England and America is, as nearly
as can be calculated from statistics, about the same, not-
withstanding that England's margin is lower than ours by
over one third. These results must be attributed wholly
FREE TRADE AND PROTECTIOK 153
to moral causes, if Mill's views as to accumulation and the
distribution of wealth under free trade are accepted;
whereas, under the views here presented, they are the
natural outcome of economic law, and afford a substantial
verification of the views themselves. While to assert
that England is richer than we in capitalized wealth, and
produces annually an equal value jper cwpita, notwith-
standing our superior natural resources, because of the
moral superiority and greater thriftiness of her popula-
tion, will hardly avail to convince many of the soundness
of Mill's deductions.
It may, however, be useful in this connection to again
quote from the " Principles of Political Economy." In
Book Y, chapter x, section 1, I find the passage :
" It was shown, however, in our analysis of the eflfects of inter-
national trade, as it had been often shown by former writers, that
the importation of foreign commodities, in the common course of
traffic, never takes place, except when it is, economically speaking,
a national good^ by causing the same amount of commodities to be
obtained at a smaller cost of labor and capital to the country. To
prohibit, therefore, this importation, or to impose duties which pre-
vent it, is to render the labor and capital of the country less efficient
in production than they would otherwise be, and compel a waste of
the difference between the labor and capital necessary for the home
production of the commodity and that which is required for produc-
ing the things with which it can be purchased from abroad."
My position is, that while the actual interchange of
goods under free trade will be in accordance, as is here
claimed, with the efficiency of both labor and capital, and
that the interest of the world at large will also be sub-
served by any increase of the efficiency of its labor, the
distribution of the advantage depends on other principles,
and the individual interests of the different nations are
regulated by other considerations, and that while a nation
154 CAPITAL AND POPULATION'.
loses, as Mill claims, from diverting its labor to industries
in whicli it is less efficient, it does not lose by the ac-
companying diversion of its capital, as such diversion,
if toward industries employing greater capital than its
old ones, allows otherwise impossible accumulations to
be made without depressing, and even for a time in-
creasing, the rate of profit, and the aggregate amount
of profits it thus enjoys may be greatly enhanced, and
that, while a part of such increase of profits will be at
the expense of the home consumer, it will not all be
BO, but will result in a substantial increase in the net rev-
enue of the country, sometimes less and sometimes great-
er, but in all cases to be offset against the loss in the effi-
ciency of its labor, which we allow will occur, before it
can be affirmed that a net loss results to such country.
And the reason that Mill failed to appreciate this re-
sult of protection can be gathered from the following
passage from Book I, chapter v, section 1 :
"Had legislators been aware that industry is limited, ly capital^
they would have seen that the aggregate capital of the country not
having been increased, any portion of it which they by their laws
had caused to he embarked in the newly-acquired branch of indus-
try must have been withdrawn or withheld from some other ; in
which it gave, or would have given, employment to probably about
(?) the same quantity of labor which it employs in its new occupa-
tion."
Industry is not limited by the extent of capital as de-
fined by himself, but only by the extent of the wages-
fund or capital in Ricardo's sense. On the contrary, the
increase of capital, needed for protected industries, is not
drawn from the wages-fund, but from dead stock, and
tends to an increase of the wages-fund, because it in-
creases the rate of profit upon which the amount of capi-
FREE TRADE AND PROTECTION. 155
tal in the sense of this quotation — i. e., the wages-fund —
really depends. The increase is ultimately drawn from
the products of an increased employment of labor, to
which the demand for the increase itself inevitably leads.
^. That the efficiency of labor is everijwhere the
same^ or nearly so, in manufacturing, hut very variaUe
in different States, in agriculture ; on account of the lat-
ter efficiency depending on the national margin of culti-
vation.
When I say that the efficiency of labor is everywhere
the same, or nearly so, in manufacturing, I do not mean
to be understood as denying or belittling the differences
in the mental and physical efficiency of different races
and nations of men, but I do mean to say that their com-
parative natural efficiency in manufacturing and in culti-
vating lands of the same fertility does not much differ.
The labor of the rice-fed Chinamen is far less effective
than that of the Anglo-Saxon, but the degree in which it
is so in manufacturing is not much different from what
it is in the cultivation of the soil, except, indeed, as such
degree of efficiency depends upon specially acquired skill
resulting from the nature of past activities, and which
practice in the unaccustomed industries would soon rec-
tify.
As Mill says in Book I, chapter vii, section 4 :
*' The third element which determines the productiveness of the
labor of a community is the skill and knowledge therein existing ;
whether it be the skill and knowledge of the laborers themselves, or
of those who direct their labor. No illustration is requisite to
show how the efficacy of industry is promoted by the manual dex-
terity of those who perform mere routine processes ; by the intelli-
gence of those engaged in operations in which the mind has a con-
siderable part ; and by the amount of knowledge of natural powers
156 CAPITAL AND POPULATION.
and of the properties of objects, which is turned to the purposes of
industry. That the productiveness of the labor of a people is lim-
ited by their knowledge of the arts of life, is self-evident ; and that
any progress in those arts, any improved application of the objects
or powers of nature to industrial uses, enables the same quantity
and intensity of labor to raise a greater produce."
But as Mill acknowledges that protective duties are
defensible for the purpose of acquiring such skill and apt-
itude, I will not dwell upon the point, although he has
been denounced for this opinion by the more ultra of his
followers, further than to call attention to the fact that
the temporary increase of industrial activity, that ensues
upon the protection of manufactures, itself provides a
fund more than sufficient for such educational purposes ;
and to quote the passage from Book Y, chapter x, section
1, in which he thus expresses himself :
" The only case in which, on mere principles of political economy,
protecting duties can be defensible, is when they are imposed tem-
porarily (especially in a young and rising nation) in hopes of natu-
ralizing a foreign industry, in itself perfectly suitable to the circum-
stances of the country. The superiority of one country over an-
other in a branch of production often arises only from having begun
it sooner. There may be no inherent advantage on one part, or dis-
advantage on the other, but only a present superiority of acquired
skill and experience. A country which has this skill and experience
yet to acquire, may in other respects be better adapted to the pro-
duction than those which were earlier in the field ; and, besides, it
is a just remark of Mr. Rae that nothing has a greater tendency to
promote improvements in any branch of production than its trial
under a new set of conditions. But it can not be expected that in-
dividuals should, at their own risk, or rather to their certain loss,
introduce a new manufacture, and bear the burden of carrying it on
until the producers have been educated up to the level of those
with whom the processes are traditional. A protecting duty, con-
tinued for a reasonable time, will sometimes be the least incon-
venient mode in which the nation can tax itself for the support of
FREE TRADE AND PROTECTION. 157
such an experiment. But the protection should be confined to cases
in which there is good ground of assurance that the industry which
it fosters will after a time be able to dispense with it ; nor should
the domestic producers ever be allowed to expect that it will be
continued to them beyond the time necessary for a fair trial of what
they are capable of accomplishing."
Nor do I overlook the fact that some increase of the
efficiency of labor engaged in manufactures follows upon
their concentration in particular localities. As Mill sajs
in Book lY, chapter ii, section 2 :
" The larger the scale on which manufacturing operations are
carried on, the more cheaply they can in general be performed.
Mr. Senior has gone the length of enunciating, as an inherent law of
manufacturing industry, that in it increased production takes place
at a smaller cost, while in agricultural industry, increased produc-
tion takes place at a greater cost. I can not think, however, that
even in manufactures, increased cheapness follows increased pro-
duction by anything amounting to a law. It is a probable and
usual, but not a necessary consequence."
With this passage I fully agree, and what eiFect the
principle has must be regarded as a deduction from the
results here obtained, and neglected, not because it is un-
real, but because it is of no great consequence, and per-
haps nearly, if not quite, offset by other economic ad-
vantages, not elsewhere noticed by me, that ensue from
the dispersion of such industries; as, for instance, the
greater chance of inventions and improvements being
made when the same industry is carried on by many
nations and races, than when it is monopolized by one or
two only.
Nor do I at all deny that climate, soil, and the min-
eral products of a country do, to some extent, affect the
efficiency of her artisan labor. The climate of Southern
Europe affords the people there advantages in the pro-
158 CAPITAL AND POPULATION.
duction of wine, which, from the amount of capital it
engages, may be economically considered rather as a com-
modity than as a raw product, and the dampness of her
atmosphere yields a certain advantage to England in spin-
ning cotton, and her mines of iron and coal give her a
natural advantage over her Continental neighbors in the
efficiency of her artisan labor. The labor-cost is less to
her than to them, but she does not possess this advan-
tage over us, as what makes cheap iron and coal, for the
purposes of this discussion, is not so much the fact that
they are extracted by cheap, as by little labor. In the
natural fertility of her mines and their abundance, she
is inferior rather than superior to America. Being an
industry in which the employment of capital is large, the
labor- cost is much more to be considered than the money-
price.
I grant at once that no endeavor should be made to
overcome by means of protective duties any real natural
advantages in manufacturing, possessed by foreign na-
tions, and that, unless such advantages are inconsiderable,
the attempt to overcome them will probably result in a
national loss.
I am justified, however, in asserting that what differ-
ences there are in manufacturing efficiency are mainly
artificial, and that the process of acquiring them may be
regarded as educational ; often, indeed, expensive, but
justified by the result, if followed ultimately by any in-
crement in the amount of the national produce.
As to the efficiency of labor in agriculture, the case
is very different. Equal physical power and intelligence,
vicissitudes of the seasons apart, will command an equal
produce only from lands of the same inherent fertility.
Every variation in the quality of the soil entails a vari-
FREE TRADE AND PROTECTION. 159
ance in the crops gathered from it. When the efficiency
of a nation's agricultural labor is lowered by poorer lands
being put under cultivation, the efficiency of her labor
employed upon the lands previously cultivated is not dis-
turbed, but a different distribution of their produce re-
sults. iJ^either profits nor proportional wages are caused
thereby to vary, but rent is increased at the expense of
real wages, and the money value of agricultural produce
continuing the same, as it may, unless affected by other
causes, money-wages will also decline to the same extent
as real.
Premising this much, I submit to the consideration of
the reader the following extract from Mill's " Principles,"
Book III, chapter xxv, sections 2 and 4 :
" Section 2. According to the preceding doctrine, a country can
not be undersold in any commodity, unless the rival country has a
stronger inducement than itself for devoting its labor and capital
to the production of the commodity ; tirising from the fact that by
doing so it occasions a greater saving of labor and capital, to be
sliared between itself and its customers — a greater increase of the
aggregate produce of the world. The underselling, therefore, though
a loss to the undersold country, is an advantage to the world at
large ; the substituted commerce being one which economizes more
of the labor and capital of mankind, and adds more to their col-
lective wealth, than the commerce superseded by it. The advan-
tage, of course, consists in being able to produce the commodity of
better quality, or with less labor (compared with other things) ; or
perhaps, not with less labor, but in less time; with a less prolonged
detention of the capital employed. This may arise from greater
natural advantages (such as soil, climate, richness of mines) ; supe-
rior capability, either natural or acquired, in the laborers; better
division of labor, and better tools or machinery. But there is no
place left in this theory for the case of lower wages. This, how-
ever, in the theories commonly current, is a favorite cause of under-
selling. "We continually hear of the disadvantage under which the
British producer labors, both in foreign markets, and even in his
160 CAPITAL AND POPULATIOJST.
own, through the low wages paid by his foreign rivals. These
lower wages, we are told, enable, or are always on the point of
enabling, them to sell at lower prices, and to dislodge the English
manufacturer from all markets in which he is not artificially pro-
tected.
"Before examining this opinion on grounds of principle, it is
worth while to bestow a moment's consideration upon it as a ques-
tion of fact. Is it true that the wages of manufacturing labor are
lower in foreign countries than in England, in any sense in which
low wages are an advantage to the capitalist? The artisan of
Ghent or Lyons may earn less wages in a day, but does he not do
less work? Degrees of efficiency considered, does his labor cost
less to his employer ? Though wages may be lower on the Conti-
nent, is not the cost of labor, which is the real element in the com-
petition, very nearly the same ? That it is so, seems the opinion of
competent judges, and is confirmed by the very little difference in
the rate of profit between England and the Continental countries.
But if so, the opinion is absurd that English producers can be un-
dersold by their Continental rivals from this cause. It is only in
America that the supposition is 'prima facie admissible. In Amer-
ica wages are much higher than in England, if we mean by wages
the daily earnings of a laborer ; but the productive power of Amer-
ican labor is so great — its efiiciency, combined with the favorable
circumstances in which it is exerted, makes it worth so much to the
purchaser — that the cost of labor is lower in America than in Eng-
land ; as is indicated by the fact that the general rate of profits and
of interest is higher.
" But is it true that low wages, even in the sense of low cost of
labor, enable a country to sell cheaper in the foreign market? I
mean, of course, low wages which are common to the whole pro-
ductive industry of the country.
"If wages, in any of the departments of industry which supply
exports, are kept artificially, or by some accidental cause, below the
general rate of wages in the country, this is a real advantage in the
foreign market. It lessens the comparative cost of production of
those articles, in relation to others; and has the same effect as if
their production required so much less labor.
" Sec. 4. These two cases of slave-labor and of domestic manu-
factures exemplify the conditions under which low wages enable a
FREE TRADE AND PROTECTION. 161
country to sell its comraodities cheaper in foreign markets, and con-
sequently to undersell its rivals, or to avoid being undersold by
them. But no such advantage is conferred by low wages when
common to all branches of industry. General low wages never
caused any country to undersell its rivals, nor did general high
wages ever hinder it from doing so.
" To demonstrate this, we must return to an elementary princi-
ple which was discussed in a former chapter.* General low wages
do not cause low prices, nor high wages high prices, within the
country itself. General prices are not raised by a rise of wages,
any more than they would be raised by an increase of the quantity
of labor required in all production. Expenses which affect all com-
modities equally, have no influence on prices. If the maker of
broadcloth or cutlery, and nobody else, had to pay higher wages,
the price of his commodity would rise, just as it would if he had to
employ more labor ; because otherwise he would gain less profit
than other producers, and nobody would engage in the employment.
But if everybody has to pay higher wages, or everybody to employ
more labor, the loss must be submitted to; as it affects everybody
alike, no one can hope to get rid of it by a change of employment ;
each, therefore, resigns himself to a diminution of profits, and prices
remain as they were. In like manner, general low wages, or a gen-
eral increase in the productiveness of labor, does not make prices
low, but profits high. If wages fall {meaning here ly wages the cost
of labor), why, on that account, should the producer lower his price ?
Re will he forced, it may te said, hy the competition of other capi-
talists who will crowd into his employment. But other capitalists
are also paying lower wages, and hy entering into competition with
him they would gain nothing hut what they are gaining already.
The rate, then, at which labor is paid, as well as the quantity of it
which is employed, affects neither the value nor the price of the
commodity produced, except in so far as it is peculiar to that com-
modity, and not common to commodities generally.
" Since low wages are not a cause of low prices in the country
itself, so neither do they cause it to offer its commodities in foreign
markets at a lower price. It is quite true that, if the cost of labor
is lower in America than in England, America could sell her cottons
* Supra, Book III, chapter iv.
162 CAPITAL AND POPULATION".
to Cuba at a lower price than England, and still gain as high a
profit as the English manufacturer. But it is not with the profit of
the English manufacturer that the American cotton-spinner will
make his comparison ; it is with the profits of other American capi-
talists. These enjoy, in common with himself, the benefit of a low
cost of labor, and have accordingly a high rate of profit. This high
profit the cotton-spinner must also have ; he will not content him-
self with the English profit. It is true he may go on for a time at
that lower rate, rather than change his employment; and a trade
may be carried on, sometimes for a long period, at a much lower
profit than that for which it would have been originally engaged
in. Countries which have a low cost of labor and high profits, do
not for that reason undersell others, but they do oppose a more
obstinate . resistance to being undersold, because the producers can
often submit to a diminution of profit without being unable to
live, and even to thrive, by their business. But this is all which
their advantage does for them ; and in this resistance they will
not long persevere, when a change of times, which may give
them equal profits with the rest of their countrymen, has become
manifestly hopeless."
It is difficult to gather from this passage the sense in
which Mill uses the term " wages " ; if he means propor-
tional wages, what he sajs in section 2 is true, provided
general prices are not affected. If prices are lowered, the
supposed country is enabled to undersell others in foreign
markets ; if prices are raised, they are enabled to under-
sell it. But in the ordinary course of affairs a change in
general prices affects the rate of proportional wages more
than any change in money- wages. A rise of prices,
money-wages remaining the same, lowers the rate, and a
fall raises it, and to such extent that in times of activity
the rate is lowered notwithstanding the rise in money-
wages that then occurs, and in stagnant times the rate is
raised notwithstanding money- wages being cut down. A
rise or fall of proportional wages is not a cause of, but is
FREE TRADE AND PROTECTION. 163
always accompanied by, because it is usually in part
caused by, a fall or rise in general prices, and this latter
does affect the ability to sell or be undersold in foreign
markets. Mill is here speaking, probably, not of its
fluctuations, but of the permanent rise of the rate which
naturally occurs in nations with large accumulations.
Such rise in proportional wages has, of course, no effect.
But Mill persistently confounds real and proportional
wages, and a fall in real wages does profoundly affect the
ability of a nation to compete in foreign markets. It in-
creases the efficiency of labor and capital in manufactures
as compared with that in agriculture. When it occurs in
a manufacturing nation it enables her to cheapen the
manufactured goods which constitute her exports, while
it lessens to an agricultural people their comparative dis-
advantage in manufacturing. This results from the fact
that profits constitute a greater proportion of the cost of
goods than of raw products. It is true, as Mill says, that
" general low wages do not cause " (average) " low prices
nor high wages " (average) " high prices within the coun-
try itself," but they do affect the relative prices of the
commodities or products that form the bulk of a nation's
exports, and do therefore affect its ability to undersell or
its liability to be undersold. It is, indeed, absurd, as MiU
says, to assert that a high rate of proportional wages in a
manufacturing country, like England, enables her com-
petitors to undersell her in the markets of the world ; but
it is absurd not for the reason Mill gives, that her ability
to compete in such markets is not at all affected by the
increase of the rate, but because the direct contrary of
the assertion is true, and any increase in her rate of pro-
portional wages aids her to undersell them in the articles
of which her exports are mainly composed, because any
164 CAPITAL AND POPULATION.
lowering of tlie rate of profit lowers manufactured goods
as compared with raw products. Mill says :
" If wages fall {meaning ly wages the cost of labor\ why, on that
account, should the producer lower his price? He will be forced, it
may be said, by the competition of other capitalists who will crowd
into his employment ; but other capitalists are also paying lower
wages, and by entering into competition with him they would gain
nothing but what they are gaining already."
This latter assertion is untrue, and is equivalent to
the denial that a high rate of profit will lead to any in-
crease in industrial activity. All other capitalists are not
" also paying lower wages," because many of them are
not paying any wages at all, or at least are employing
less labor than they might if they choose to convert more
of their dead into active stock. This class would most
certainly " crowd into his," and every other, " employ-
ment" on the occurrence of any fall in proportional
wages, until prices are again lowered by the consequent
increase of the ratio of capital to population.
But what does Mill intend by " cost of labor " ? In
the use of the word by his opponents, the idea is intended
as applying to money, or real, not proportional wages.
When it is said that labor is cheap, the meaning is, that
labor of a given effectiveness can be bought for a small
amount of money or other commodities. That this af-
fects the ability of a nation to sell certain classes of
goods to its neighbors is the only idea intended, and no
one surely will deny that it does so. Real wages and
the margin of cultivation mutually depend on each other.
That real wages are small is because the margin is low,
and that the margin is low is because the laborer is con-
tent to increase the population notwithstanding real
wages being low.
FREE TRADE AND PROTECTION. 165
A lowering of the margin of cultivation has no effect
upon the increase of agricultural prices. That price (cost
of carriage, etc., apart) must be the same the world over.
When a nation, from any cause, lowers its margin, corn
will bring no higher price, because, if it did, it would be
soon undersold bj foreign corn, and would remain in the
granaries of the farmer ; but the farmer can no longer
sell it at the old price and pay the same money or real
wages. These will, therefore, very soon be lowered, but
this will also entail a corresponding lowering of the wages
of artisans, and, as profits are not affected, of the prices
of manufactured goods. This will affect the ability of
the nation to undersell its manufacturing rivals. All
that those who complain of " the competition of pauper
labor" should mean is, that the lowness of their real
wages prevents us from competing with foreigners in
manufacturing. They have sometimes complained in
terms that seemed to imply that such competition tended
to lower the real wages of our own operatives, and, so far
as they have done so. Mill is right in dismissing their
complaint, and also right in asserting that (except as the
equation of international demand is affected) the gen-
eral ability to sell in foreign markets is not affected
by the proportion between wages and profits. When,
however, he draws the implication from his argument
that the ability to sell particular classes of commodities
is not affected, he is as certainly wTong, and, however
he has understood his opponents, and however loosely
they have expressed themselves, this is all that is really
necessary to the argument in favor of protection, show-
ing as it does that if there is any inherent benefit to a
nation, other things being equal, in diverting its indus-
try from agriculture to manufactures, such advantage
166 CAPITAL AND POPULATION.
can not be realized if an unrestricted international inter-
change is allowed.
I have already proved that such an advantage exists,
but it may not be useless to again do so by another illus-
tration :
Let us suppose, then, two peoples of equal population,
say of one million laborers, with an equal rate of profit,
say ten per cent ; the margin of cultivation in one being
so much lower than in the other that, by an equal amount
of physical effort on the poorest lands of each, only half
the produce of the other was obtained by the more sterile
nation. Let us further suppose that the amount of gold
in each was such that a bushel of wheat brought the same
price in both (which result would be a necessary conse-.
quence of their trading with each other a short time, what-
ever the original distribution of gold). Now, let us suppose
these nations to be completely isolated from each other
and from all the world, and the problem is, to ascertain how
the annual product of one would compare with that of the
other, and then to ascertain how interchanging commodi-
ties will affect them. If we take it for granted, as would be
nearly the case, that the consumption of food would be the
same in each, the more fertile would employ a larger pro-
portion of its labor as artisans than the other. Let us sup-
pose that two fifths of its population raise its food, the
remaining three fifths will be engaged in manufactures.
In the more sterile, four fifths will then be employed in
farming and only one fifth as artisans, leaving rent for
the moment out of the account. The richer country
will produce annually two fifths more than the sterile of
material commodities, less the excess of the agricultural
rent of the sterile over that of the fertile country, and
this excess (of two fifths less rent) will be wholly in manu-
FREE TRADE AND PROTECTIOK 167
factured commodities. What the excess of rent will be,
can not be calculated. It might be very little, or even in
favor of the more fertile country, but it could hardly be
80 great as to entirely absorb the difference in the pro-
ductive capacity of the two nations. Let us suppose it
to be one fifth, although one tenth would probably be a
liberal estimate. The fertile nation would then be only
twenty per cent better off than the sterile in its produc-
tive efficiency, and the latter would employ three fifths
of its population in raising food and two fifths in manu-
facturing.
The exchangeable or gold value of their produce
would, however, vary much more. Supposing profits in
both at ten per cent, and that, on the average, manufact-
ures employed an excess of plant over farming equal to
twice the annual amount of manufacturing wages, the
gold value of the product of three hundred working days
(wages being one dollar in the sterile, and two dollars in
the fertile land) would be as follows :
IN THE FEETTLE OOUNTET.
Wages of 400,000 men 300 days, at $2.00, in
agriculture $240,000,000
Wages of 600,000 men 300 days, at $2.50, in
manufactures 450,000,000
(I here suppose the skilled labor of artisans
to be worth twenty-five per cent more than
unskilled agricultural labor.)
Profits on circulating capital 69,000,000
Profits on fixed capital 90,000,000
Profits on rentals 6,000,000
Rent (assumed) 60,000,000
$915,000,000
For convenience in calculating, I assume the rental to
be paid in advance by the farmer.
168 CAPITAL AND POPULATIOK
IN THE STEEILE COUNTRY.
TVages of 600,000 men 300 days, at $1.00, in
agriculture $180,000,000
Wages of 400,000 men 300 days, at $1.25, in
manufactures 150,000,000
Profits on circulating capital 33,000,000
Profits on fixed capital 30,000,000
Profits on rentals 12,000,000
Eent, by supposition one fifth the value of
300,000,000 days' agricultural labor in
addition to the Cental of the fertile coun-
try 120,000,000
$526,000,000
This excess of $390,000,000 in tlie gold value of its
products does not express, however, the real advantage
in material things that the fertile country possesses. The
gold value and the real amount of the agricultural prod-
uce is the same, agricultural profits, wages, and rent to-
gether amounting to the same sum, $330,000,000. The
gold value of manufactured goods is, however, twice as
great in the fertile as in the sterile country ; her real
advantage is, therefore, less than these figures show.
The real amount is the product of 200,000 laborers
employed as artisans for 300 days, together with the
profits of the fixed and circulating capital. With profits
and wages as supposed, the value of such product in the
fertile country would be $195,000,000, or $97,500,000
in the sterile.
"Now let us suppose these countries to commence trad-
ing together. At first the sterile nation would export
goods and import gold; when that had affected prices
suflSciently, it would commence to import food and raw
products also, and to divert its labor from agriculture to
FEEE TRADE AND PROTECTION. 169
manufactures, while industry in the fertile country would
take the reverse direction. If population remained sta-
tionary and there were no cost of carriage to be considered,
the ultimate result would be that the margin of cultiva-
tion would be the same in both countries, except such
small difference as would lead the sterile country to con-
tinue importing food, which we will disregard. If we
further suppose the gradation in the fertility of the lands
previously cultivated to be the same in both, the sterile
country would have previously cultivated twice the land
that the fertile did, less the difference expressed by its
greater rental, which we liave assumed as half such excess.
The sterile country would then attain the same margin
by throwing the poorest third of her land out of cultiva-
tion, if we suppose, as would probably be the case, that,
on account of the abundance of her fertile land, the in-
crease of agricultural industry did not lower the margin
in the fertile country.
The sterile land would now employ two fifths of its
labor agriculturally and three fifths in manufactures, and
the fertile only two fifths as artisans and three fifths as
farm-hands ; its artisans being then employed in the
coarser manufactures, requiring but little capital, which
circumstance, though greatly assisting my argument, I
will leave out of the calculation.
Money, real and proportional wages, would now be
the same in both countries. Prices of both raw products
and goods would also be the same, except, of course,
to such extent as would lead to a continuance of com-
mercial relations, which difference I disregard in the
calculation below. Let us compute the real, now also
the exchangeable, value of the annual product of the
two nations :
170 CAPITAL AND POPULATION.
THE FERTILE COUNTET.
Wages of 600,000 men 300 days, at $1.60, in
agriculture $288,000,000
(The money value of a day's wages will be
such that the joint product of the two coun-
tries will have the same money value as be-
fore, as no increase or decrease of gold has
occurred. The rates here supposed bring
about this result as nearly as any that could
be conveniently used.)
Wages of 400,000 men 300 days, at $2.00, in
manufactures 240,000,000
Profits on circulating capital 52,800,000
Profits on fixed capital 48,000,000
Profits on rentals 6,000,000
Rent as before 60,000,000
$694,800,000
THE STEEILE COTTNTET.
Wages of 400,000 men 300 days, at $1.60, in
agriculture $192,000,000
Wages of 600,000 men 300 days, at $2.00, in
manufactures 360,000,000
Profits on circulating capital 65,200,000
Profits on fixed capital 72,000,000
Profits on rentals 6,000,000
Rent, now only 60,000,000
$745,200,000
The total production of the sterile country is now
greater than that of the fertile by a value of $50,400,000,
which, divided by $2.60 (the cost in profits and wages of
a day's product of artisan labor), gives the material product
of 19,384,615 days of artisan labor ; whereas the relative
advantage formerly belonged to the fertile country to the
extent of 60,000,000 days of such labor. The total rela-
tive gain of the manufacturing country is 79,384,615 days
FREE TRADE AND PROTECTION. 171
of artisan labor, but tbe total gain to tliem both by their
intercourse- can not be more than the gain in eflSciency of
the 200,000 laborers transferred from manufacturing to
agriculture in the fertile country. This gain is of half
their labor, and amounts to the products of 30,000,000
days' labor employed in agriculture, which is equal to
24,000,000 days of artisan labor. The manufacturing
country has obtained, as the fruits of free trade, and
solely at the expense of the agricultural, the products of
55,384,615 days of artisan labor, and the whole gain, be-
sides, of the increased efficiency of the united labor of
them both.
I have supposed, of course, an extreme though per-
fectly permissible case. As the effect of the intercourse,
population would advance so as to keep the margin of
cultivation considerably lower in the sterile country than
in the fertile, and as far as this happened her relative and
absolute gain would be lessened. The rate of profit, the
comparative efficiency of labor in manufacturing, the
equation of international demand, with its consequent
indebtedness of the fertile to the sterile nation, would all
affect the result, and none of these causes can be so ap-
proximately estimated as to give any value to computa-
tions based upon them. I will only say of them that the
equation of international demand, as we shall hereafter
see, will also tend to the benefit of the manufacturing
nation, and that any lowering of the margin of cultiva-
tion in the agricultural land will be an added detriment
to it and to the world, so that, in practice, whenever the
two margins became the same, the loss of the latter coun-
try through free trade would be much greater, and the
gain to the world less, than I have figured.
The results I have obtained in my calculations are in-
172 CAPITAL AND POPULATION.
explicable if Mill is right as to the distribution of advan-
tage under free trade. He certainly is right, however, if
his views as to capital, here combated, are correct. In
Book III, chapter xviii, section 2, he says :
" It is even possible to conceive an extreme case, in which the
whole of the advantage resulting from the interchange would be
reaped by one party, the other country gaining nothing at all."
He is here discussing the equation of international de-
mand, and what he says is true as affecting that question,
but is certainly less than true as affecting international
trade, as we have seen in the instance supposed. He
.everywhere assumes, and sometimes distinctly asserts,
that the effect of international exchange upon the distri-
bution of wealth can not exceed the Kmits of the in-
creased product that results from the same cause-
In this variance of my view from that of Mill I find
that I, rather than he, am sustained by the authority of
Eicardo. The appeal to his decision can not be very
definite, as the point had not then arisen in the discus-
sion of the subject ; but, in his whole chapter on foreign
trade, Kicardo scrupulously, and with apparent care, dis-
cusses the subject of international exchange in terms of
labor only, whereas Mill as carefully does so in terms of
both labor and capital. Ricardo's exemplification of the
subject contains absolutely nothing in conflict with the
views here set forth, although there is much in these
views not to be found in his pages. He considers the
sole advantage of foreign trade to consist in the exchange
of the products of a smaller for those of a larger amount
of labor, without any regard to the profits of capital.
Mill considers it to consist in the exchange of a smaller
amount of money-wages and profits for what would other-
wise cost a larger amount of money-wages and profits ;
FREE TEADE AND PROTECTION". 1Y3
while I hold that the comparison must be made between
the labor expended on the products exchanged for the
imported commodity, and the labor that could have pro-
duced such commodity at home. My view, therefore,
almost coincides with that of Ricardo, and the weight of
his authority is decidedly against Mill.
Eicardo also distinctly acknowledged, although he
did not pursue the subject to its conclusion, that the dis-
tribution between the two nations of their joint product
may be to the absolute disadvantage of one of them, not-
withstanding an increase of such joint product. In chap-
ter XXV, on '^ Colonial Trade," p. 205, he says :
" That tlie loss sustained through a disadvantageous distribution
of labor in two countries may be beneficial to one of them, while the
other is made to sufi'er 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 hurt-
ful to a colony may be partially beneficial to the mother-country."
Here is a most positive accordance with my view, and
a disagreement from that of Mill. The wonderful de-
ductive power of Eicardo's mind preserved him from
most of Mill's errors. Starting from capital as he de-
fined it, I find little in his work to object to, except the
definition of capital itself, and the fact that occasionally
he has used the term in a broader signification than his
definition allows. It is Mill, and not I, who differs from
him, because he has applied Eicardo's deductions to a
definition of capital not contemplated by him, and from
which the deductions by no means follow, or were in-
tended by Eicardo to follow.
While, therefore, the proportional cost of labor to
some extent determines the nature of a nation's indus-
174 CAPITAL AND POPULATION.
tries, the real or money cost does so to a much greater
degree ; and I am entitled to affirm that a high rate of
real or money wages diverts the industry of a nation into
those channels where it derives the least benefit from the
use and increase of its capital, and where its labor is
more wastefully, because more unskillfuUy, applied.
3. That the efficiency of labor is miifoTm in manu-
factures^ hut "variable in agriculture as affected by the
vicissitudes of the seasons.
This difference between agriculture and manufactures
will be of importance later on, as affecting the equation
of international demand, and is only noted here to pre-
serve the symmetry of the argument.
CHAPTEE XI.
THE EQUATION OF INTERNATIONAL DEMAND.
In the discussion of this question, Mill, in Book III,
chapter xviii, section 4, says :
"If, therefore, it be asked what country draws to itself the great-
est share of the advantage of any trade it carries on, the answer
is, the country for whose productions there is in other countries the
greatest demand^ and a demand the most susceptible of increase from
additional cheapness. In so far as the productions of any country
possess this property, the country obtains all foreign commodities at
less cost. It gets its imports cheaper, the greater the intensity of
the demand in foreign countries for its exports. It also gets its im-
ports cheaper, the less the extent and intensity of its own demand
for them. The market is cheapest to those whose demand is small.
A country which desires few foreign productions, and only a limited
quantity of them, while its own commodities are in great request in
foreign countries, will obtain its limited imports at extremely small
cost — that is, in exchange for the produce of a very small quantity of
its labor and capital."
"With all of which I, of course, agree. When, how-
ever, in section 8, in further elucidation of the subject,
he says —
" The only general law, then, which can be laid down, is this.
The values at which a country exchanges its produce with foreign
countries depend on two things : First, on the amount and extensi-
bility of their demand for its commodities, compared with its de-
mand for theirs ; and, secondly, on the capital which it has to spare.
176 CAPITAL AND POPULATION-.
from the production of domestic commodities, for its Own consump-
tion. The more the foreign demand for its commodities exceeds its
demand for foreign commodities, and the less capital it can spare to
produce for foreign markets, compared with what foreigners spare
to produce for its markets, the more favorable to it will be the
terms of interchange ; that is, the more it will obtain of foreign
commodities in return for a given quantity of its own.
"But these two influencing circumstances are in reality reducible
to one ; for the capital which a country has to spare from the pro-
duction of domestic commodities for its own use is in proportion to
its own demand for foreign commodities; whatever proportion of its
collective income it expends in purchases from abroad,, that same pro-
portion of its capital is left without a home marTcet for its produc-
tions. The new element, therefore, which, for the sake of scientific
correctness, we have introduced into the theory of international val-
ues, does not seem to make any very material difference in the prac-
tical result " —
I do not wholly foUow him. He must surely be wrong
when he affirms, " Whatever proportion of its collective
income it expends in purchases from abroad, that same
proportion of its capital is left without a home market for
its productions." This would only be true of a nation
whose exports were equally composed of goods and raw
produce, or rather of one the value of whose exports
was composed of profit to the same degree as its articles
for home consumption. But we have seen that the nature
of a nation's industries and exports depends mainly upon
its margin of cultivation. An over-populated country
will export a much larger proportion of articles, the price
of which is due largely to profits, than an under-populated.
A mutual and equal decrease of demand between them
will, therefore, liberate less labor and more capital in the
manufacturing than in the agricultural country. This
will lower profits and decrease production in the former,
and raise profits and increase production in the latter,
THE EQUATION OF INTERNATIONAL DEMAND. 177
until the ratio of capital to population is readjusted.
Conversely, a mutual and equal increase of demand will
raise profits and increase production in the former, and
lower profits and decrease production in the latter. A
growing trade between them will result in a larger pro-
portion of benefit to the manufacturing and smaller pro-
portion of benefit to the agricultural nation. To illus-
trate, let us suppose that the value of the exports of
America to England, being mainly raw produce, is com-
posed of eighty per cent wages and twenty per cent prof-
its, the value of her articles of home consumption being
seventy per cent wages and thirty per cent profits, while
the value of England's exports to America, mainly highly
manufactured goods, is composed fifty per cent of wages
and fifty per cent of profits, her articles of home consump-
tion being of sixty-five per cent wages and thirty-five per
cent profits. On a decrease of trade between the two
nations, England would be obliged to employ sixty-five
laborers to utilize the same capital that formerly employed
only fifty, while America would have to employ only sev-
enty to utilize the capital that formerly employed eighty.
I think I have conclusively shown that the effect of this
would be, through the competition of capital in England,
to raise proportional wages there, and to lower them in
America through the competition of laborers. This could
not but lead to a decrease in the industrial activity of
England, and an increase in that of America.
" These two influencing circumstances " are not there-
fore really reducible to one. A mutual and equal de-
crease of demand would, in some degree, afiect the equa-
tion of international demand between England and Amer-
ica, as it would certainly tend to lower the price of Eng-
lish commodities and raise the price of American — a re-
178 CAPITAL AN"D POPULATIOISr.
suit, as far as it goes, beneficial to us, while an incri
in such demand would have a contrary tendency, and be
in some degree hurtful to American interests. The more
extensive, therefore, the commerce that is carried on be-
tween England and America, the more will the equation
of international demand incline in favor of the former,
because, as Mill says :
" The less capital it (a nation) can spare to produce for foreign
markets, compared with what foreigners spare to produce for its
markets, the more favorable to it will be the terms of interchange."
Later on, in Book Y, chapter x, section 1, Mill ac-
knowledges this effect, though for somewhat other rea-
sons than those here advanced. With those reasons I
agree, and quote the passage as illustrating another and
admitted advantage that may result from protection, and
which, although not of itself sufficient to justify that pol-
icy, augments, in no inconsiderable degree, the sum of
the various advantages which are, in most instances, its
complete justification :
"Those who have not well considered the subject are apt to
suppose that our exporting an equivalent in our own produce, for
the foreign articles we consume, depends on contingencies — on the
consent of foreign countries to make some corresponding relaxation
of their own restrictions, or on the question whether those from
whom we buy are induced by that circumstance to buy more from
us ; and that if these things, or things equivalent to them, do not
happen, the payment must be made in money. Now, in the first
place, there is nothing more objectionable in a money payment than
in payment by any other medium, if the state of the market makes
it the- most advantageous remittance ; and the money itself was first
acquired, and would again be replenished, by the export of an
equivalent value of our own products. But, in the next place, a
very short interval of paying in money would so lower prices as
either to stop a part of the importation, or raise up a foreign demand
THE EQUATION OF INTERNATIONAL DEMAND. 179
for our produce sufficient to pay for the imports. I grant that this
disturbance of the equation of international demand would be in
some degree to our disadvantage, in the purchase of other imported
articles ; and that a country which prohibits some foreign commodi-
ties does, cceteris paribus, obtain those which it does not prohibit, at a
less price than it would otherwise have to pay. To express the
same thing in other words : a country which destroys or prevents
altogether certain branches of foreign trade, thereby annihilating a
general gain to the world, which would be shared in some propor-
tion between itself and other countries, does, in some circumstances,
draw to itself, at the expense of foreigners, a larger share than
would else belong to it of the gain arising from that portion of its
foreign trade which it suffers to subsist. But even this it can only
be enabled to do, if foreigners do not maintain equivalent prohibi-
tions or restrictions against its commodities."
Again, in Book III, chapter xviii, section 8, Mill goes
on to say :
" It still appears that the countries which carry on their foreign
trade on the most advantageous terms are those whose commodi-
ties are most in demand by foreign countries, and which have them-
selves the least demand for foreign commodities. From which,
among other consequences, it follows that the richest countries,
cceteris paribus, gain the least by a given amount of foreign com-
merce ; since, having a greater demand for commodities generally,
they are likely to have a greater demand for foreign commodities,
and thus modify the terms of interchange to their own disadvantage.
Their aggregate gains by foreign trade, doubtless, are generally
greater than those of poorer countries, since they carry on a greater
amount of such trade, and gain the benefit of cheapness on a larger
consumption ; but their gain is less on each individual article con-
sumed."
"We fail to see that this necessarily follows. The pro-
portion of a nation's income which will be expended upon
imported commodities does not so much depend upon
the gross amount of such income, nor upon the average
income ^er capita of her population, as upon the greater
180 CAPITAL AND POPULATION".
or less variety of her own products, which is always less
in agricultural than in manufacturing countries. If we
suppose three nations one of whom was willing and able
to import a value of $100,000,000, and the other two
only $80,000,000 each, it is perfectly conceivable that the
rich nation might exchange $50,000,000 with each, and
they $30,000,000 with each other, and the equation not
be at all affected thereby. If the richer nation desired
to import $110,000,000, whether she could do so, without
affecting the equation, would depend entirely upon the
willingness of the others to transfer their demand from
each other to her. If, indeed, one nation should demand
all the exportable produce that other nations could spare,
the equation would be affected disastrously for her, but
this could not occur simply from the greater wealth of
any nation, but also from its increase of territory, in
which case, owing to the increase in the variety of its
own industries, the proportion of its demand for foreign
products would be correspondingly lessened.
But it is not always true that the aggregate demand of
rich countries (by which is here meant, countries of large
capital in proportion to their population) is greater than
that of poorer ones. The demand is likely to be not in
proportion to the capital, but to the annual produce, of
different nations. England is far richer than we, but her
annual produce jper capita is supposed to be about the
same. As affecting our trade with her, little or no effect
upon the equation can be attributed to the comparative
wealth of the two nations.
The equation is, however, profoundly affected by the
proportion in which the total income of the two countries
is divided between the wages and capitalist classes. As
a country engages in manufacturing chiefly because its
THE EQUATION OF INTERNATIONAL DEMAND. 181
margin of cultivation is low, its real wages and total
wages-fund will be considerably less than the real wages
and wages-fund of an agricultural country. J^ow, it will
not be disputed that the larger the income of any indi-
vidual, the smaller the proportion of it will be expended
by him for food, and the larger for manufactured goods.
The average incomes of American laborers are much
larger than the average incomes of English laborers.
Their demand will, therefore, be somewhat greater for
manufactured goods. The English capitalists enjoy on
the average a greater income and a greater gross sum of
profits than the American ; and, consequently, a larger
proportion of their demand will be for goods and a smaller
for food. In each country the relatively preponderating
class will exert a proportionally larger demand for Eng-
lish goods than they will for American products. This
can not but result in the demand for English products
being greater than the demand for American,* and must
incline the equations very considerably in England's fa-
vor. It can be stated, as a general law of international
demand, that the demand of a country with a low margin
of cultivation for the products of a country with a high
margin will be less than the reciprocal demand for its
goods by the other, and, cceteris paribus, the greater share
of the benefit of their mutual intercourse will accrue to
the more sterile country.
I would refer to the following passage from Mill's
* Whether the greater demand for English goods comes from America
or England makes no difference, as the greater the English demand for her
own goods the less she can spare of them for export. It is the total de-
mand which will sustain the prices of English goods somewhat above what
would otherwise be their natural level, and correspondingly depress the
prices of American produce, and it is through these prices that the equa-
tion of international demand would be affected and expressed.
182 CAPITAL AND POPULATION.
" Principles," as explaining and elucidating international
demand, Book III, chapter xx, section 3 :
" From the preceding considerations, it appears that those are
greatly in error who contend that the value of money, in countries
where it is an imported commodity, must be entirely regulated by
its value in the countries which produce it, and can not be raised
or lowered in any permanent manner unless some change has taken
place in the cost of production at the mines. On the contrary, any
circumstance which disturbs the equation of international demand
with respect to a particular country, not only may, but must, affect
the value of money in that country — its value at the mines remain-
ing the same. The opening of a new branch of export trade from
England ; an increase in the foreign demand for English products,
either by the natural course of events or by the abrogation of duties ;
a check to the demand in England for foreign commodities, by the
laying on of import duties in England or of export duties elsewhere
— these, and all other events of similar tendency, would make the
imports of England (bullion and other things taken together) no
longer an equivalent for the exports ; and the countries which take
her exports would be obliged to offer their commodities, and bullion
among the rest, on cheaper terms, in order to re-establish the equa-
tion of demand ; and thus England would obtain money cheaper
and would acquire a generally higher range of prices. Incidents
the reverse of these would produce effects the reverse — would re-
duce prices ; or, in other words, raise the value of precious metals.
It must be observed, however, that money would thus be raised in
value only with respect to home commodities; in relation to all
imported articles it would remain as before, since their values would
be affected in the same way and in the same degree with its own.
A country which, from any of the causes mentioned, gets money
cheaper, obtains all its other imports cheaper likewise."
I have heretofore been discussing the question of free
trade or protection under the supposition that the equa-
tion of international demand did not operate unfavorably
to agricultural nations ; but we now see that a further ad-
dition to the possible benefits of protection, beyond those
THE EQUATION OF INTERNATIONAL DEMAND. 183
already enumerated, is to be found in the fact that pro-
tection tends to adjust that equation more to the advan-
tage of an agricultural country. Even if, under free
trade, such country suffered no loss in the gross amount
of its profits, and from its labor being diverted from
highly paid and skilled to more poorly paid and unskilled
industries, and from its female labor being less utilized, it
could still hope for little or none of the benefit accruing
from the greater efficiency of its own labor, as its just
share of this benefit would be all or nearly all transferred,
by the operation of the laws of international demand, to
the manufacturing nations with which it traded.
I have thus far been exclusively considering the com-
mercial intercourse that takes place between civilized
nations, in which the augmentation and application of
capital are affected only by economic and not by moral
causes, at least to any appreciable degree. It may be well
in this connection to consider the effects of free trade be-
tween two such countries as England and India. The
margin of cultivation in India is much lower than in
England, and yet she remains an agricultural land, and
depends upon the latter very largely for her manufactured
goods. Ostensible profits are very high. This is largely
owing to the insecurity of capital, but, after every deduc-
tion is made on that account, the real rate of profit is un-
doubtedly higher than in England. Under a natural and
civilized state of affairs she would manufacture for Eng-
land, and not England for her, despite this last circum-
stance. Why does she not do so ? There are no eco-
nomic reasons, except her disadvantage in the cost of coal,
which is very far from balancing her advantage in the
low money and real cost of her labor, and that there, as
in most uncivilized countries, population presses upon
184 CAPITAL AND POPULATION.
capital instead of capital upon population. Her seasons
of industrial depression are never the result of a plethora
of dead stock, but of an actual insufficiency of all her
stock to support her laborers from harvest to harvest ; and
although I have not the statistics at hand to prove the as-
sertion, and doubt whether such statistics exist, I venture
to assert that in such periods her rate of profit, if it could
be ascertained, would be found to advance instead of to
recede, as it does in civilized nations, in their periods of
depression. That population presses upon capital is the
effect wholly of moral causes, but it renders India phys-
ically incapable of accumulating the capital required for
manufacturing. If the security afforded by English rule
leads gradually to an increase in the desire to accumulate,
and her capital once gains a foothold in manufacturing,
it will not be long before England will be forced to shut
out her competition by protective duties, as, I understand,
she practically does now by discouraging, by every means
in her power, any diversion of Indian industry from agri-
culture to manufactures.
While the rate of profit in India is higher than in
England, the share of the gross product that accnies to
capital is less, because her fixed capital and dead stock are
many times less than her circulating, while in England
the fixed is several times the amount of circulating wealth.
On account of the. scarcity of the precious metals there,
exchange between the two countries should be in favor
of India, and for a long time was so, as was shown by
her continued import of silver. Lately, however, the
exchange has turned in England's favor, and it has done
so on account of the extent of the remittances from India
to England as interest on English capital there invested.
Whatever benefit India derives from such investments is
THE EQUATION OF INTERNATIONAL DEMAND. 185
subject to the serious drawback of the disturbance of the
exchange and equation to her injury. If, therefore, Eng-
lish capital should be further invested in manufacturing
in India, the result would be a further disturbance of the
equation that would leave to India little or none of the
benefit of having factories established in her midst. JS'ow
there is a positive loss to the world in England's manu-
facturing for India. There would be a great gain in in-
dustrial efiiciencj if India should divert some of her
labor from agriculture to manufactures, and England or
some other country transform an equivalent number of
her artisans into agriculturists. Mill must, therefore, be
wrong when he asserts that the equation of international
demand can only vary within the limits of the advantage
to the world afforded by free trade, as the equation is
here in favor of England, notwithstanding a loss to the
world of productive efficiency. Any tribute paid by one
country to another, whether in the shape of a tax or of
the interest and profit of invested capital, affects the
equation to the injury of the paying nation, independent
of any other cause or limit.
The advantage which England derives from her con-
quest of India is not only the profit of the ensuing trade,
but also the opportunity afforded her for investment
there, which, by draining off English capital, has not only
added to her income the interest and profits of such cap-
ital, which otherwise she could not have accumulated,
but has also, by sustaining the rate of profit at home,
enabled her to increase her industrial activity and the
amount of her annual product. She has supplanted w^ith
her own capital the capital which India would naturally
have accumulated if she had enjoyed a like security under
her own rulers, and, in so far as she has done so, she has
186 CAPITAL AND POPULATION.
absorbed at the expense of India the benefits of the secu-
rity she has conferred upon her.
As long as the equation of international demand be-
tween the two countries remains as it is, the value of the
home commodities of India can not advance and may
recede, and the value of her imported commodities can
not recede and may advance. But the implication in
what I have heretofore said, that the equation is equalized
when gold or silver ceases to pass between two countries,
is untrue. The flow of specie or bullion stops when any
equilibrium of demand is reached, however disadvanta-
geous such equilibrium may be to one of the countries.
The equation is only really equal when there is an equal
division of the benefits of the international exchange.
England at present derives in her commerce with India
all or nearly all of this benefit ; indeed, the assertion may
be hazarded that she enjoys more than all, and yet the
equation has reached an equilibrium or rather yet inclines
to the favor of England — whereas the bulk of the benefit
would naturally go to India, until the consequent influx
of specie had raised the prices of her raw produce nearly
to the same level as prices of raw produce in England.
If India should protect her own (not borrowed) capital,
invested in factories, this state of affairs would quickly
cease. Her demand on England would be lessened, and
the equation readjusted in her favor, and it would not at-
tain an equilibrium until she had received her proper share
of the metallic currency of the world. In her case the
benefits of a protective policy would not be liable to any
offset on account of a loss in the efiaciency of her labor,
as it would result in a positive gain in this respect. But
when, as the result of protection, her manufacturers were
once firmly established, her interests would be advanced
THE EQUATION OF INTERNATIOlSrAL DEMAND. 187
by the general adoption of free trade, as she would then
be able to undersell in manufactures most of the nations
of the earth, and appropriate to herself those indus-
tries that allow the utilizations of the largest capitals
and the employment of her labor in the better paid
avocations, and which employ female labor to the greatest
degree.
There is little danger to European nations of India
pursuing any such course. England will not allow her
to do so, as long as she is able to control her action, and
the anarchy that would follow a release from English
rule would yet more effectually prevent it. But, while
India is helpless, China and Japan are not. They have
already entered upon an industrial competition with
Europeans, and have driven them from every field
upon which they have entered as competitors. China is
now doing all her own sea-board carrying-trade, and has
even established a steamship line to our shores. She
and Japan also will soon be erecting cotton, silk, and
woolen mills, and, when they do, competition with them
by English and American labor will be utterly futile
under free trade. They will as certainly monopolize our
markets as their own. Their margin of cultivation is
too low for us to contend with them in the most desir-
able departments of human endeavor. When they have
adapted their capital and population to the new econom-
ic conditions, they will obtain for themselves not only all
the benefit of the increased efficiency of labor, but much
more, at our expense; until, finally, our more rapid in-
crease of population shall have reduced our margin to
theirs, and reduced the moral and physical status of our
laboring population to that of their coolies. The re-
morseless competition of free trade will bestow more
188 CAPITAL AND POPULATION".
than all the advantages of international intercourse upon
the lowest and least developed races of mankind.
Returning again to the consideration of the exchange
between civilized nations, I would call attention to an-
other circumstance affecting the equation between manu-
facturing and agricultural nations, viz., the third inher-
ent difference I have noted in the last chapter between
the efficiency of the two kinds of labor. I then said :
"<?. That the efficiency of labor is uniform in manufactures^ hut
variable in agriculture^ as affected by the vicissitudes of the seasons^
It is a fully conceded fact that the adjustment of the
equation of demand and supply acts more violently on
the prices of food and raw products than on the prices of
manufactured goods. E'ot only are they more perishable,
and not so capable of being held for a better market, but
the demand neither increases nor decreases in proportion
to their cheapness and dearness. That this affects the
equilibrium of the equation to the advantage of manu-
facturing countries, Mill himself allows in the quotation
I have made from him at the beginning of this chapter ; *
and how important this concession is, can not but strike
any one familiar with his illustration of the adjustment
of the equation in the supposed trade between England
and Germany, in cloth and linen. In this illustration he
shows how the whole benefit may accrue to the nation
whose demand for the products of the other increases
least as the effects of cheapness, and certainly the demand
* Book III, chapter xviii, section 4 : " If, therefore, it be asked what
country draws to itself the greatest share of the advantage of any trade it
carries on, the answer is, the country for whose productions there is in
other countries the greatest demand, and a demand the most susceptible of
increase from additional cheapness."
THE EQUATION OF INTERNATIONAL DEMAND. 189
of a manufacturing nation for agricultural produce ful-
fills this condition.
But the eflSciencY of agricultural labor being so large-
ly determined by the vicissitudes of the seasons, produces
another effect in addition to this. A high price of man-
ufactured goods immediately leads to and is accompa-
nied by a great increase of production, and such high
price is realized on a greater product, but a high price
of raw products is caused and accompanied by a small
amount of production, and is only realized on a relatively
lesser product. This effect, to be sure, is partly compen-
sated by the high price of raw products being longer
sustained than the high price of goods, because the supply
which will eventually lower the price can not so soon
be obtained. It is not wholly so compensated, because
the supply of goods comes gradually, and, on account of
the greater employment of labor it calls for, unproductive
consumption is increased, and any increase of unproduc-
tive consumption tends to longer sustain prices and prof-
its. The increase of the supply of~ raw produce and food
comes suddenly. It is usually affected at once, as soon
as a new harvest is gathered ; but, unlike a scarcity of
goods, a scarcity of raw produce and food does not lead
to any increase in the employment of labor, but rather
to a decrease, unless, indeed, it is continued through sev-
eral seasons, and then the effectual demand of laborers is
greatly lessened, even though more are employed, on
account of the consequent fall in their real wages. The
scarcity price is not, therefore, at all sustained by an in-
crease of unproductive consumption, and as the profits
of different industries in different nations do not so
strongly tend to equality as do the profits of different in-
dustries within a nation, it follows that fluctuations in
190 CAPITAL AND POPULATION.
value will tend, on the whole, to benefit manufacturing
rather than agricultural profits and prices.
The effect upon the equation of international demand
of the inherent differences between agriculture and man-
ufactures is, as far as I am aware, a result that has hardly
been noticed, much less discussed, by economists. Mill
does barely touch upon the subject in discussing the cost
of bullion in Book III, chapter xix, section 2, where he
says :
" Countries whose exportable produce consists of the finer man-
ufactures, obtain bullion, as well as all other foreign articles, cwteris
paribus, at less expense than countries which export nothing but
bulky raw produce."
But neither here nor elsewhere has he given to the sub-
ject much consideration.
I am by no means confident that I have enumerated
all of the causes which affect the equation to the detri-
ment of an agricultural people ; much, doubtless, that I
have failed to observe might be elucidated by further
discussion ; but I have shown that the equilibrium of the
equation wiU certainly be reached at a point that will
yield the largest share of benefit to manufacturing na-
tions. What are the limits within which the equation
must somewhere settle ? Mill asserts that such limits are
supplied by the increased efficiency of labor and capital
due to international trade — ^Ricardo, to the increased
efficiency of labor alone. The gain to the world is surely
no more than the increase in the efficiency of labor. In-
deed, I utterly fail to comprehend the expression, "in-
creased efficiency of capital " as relating to the nationality
of capital. It can not refer to the rate of profit ; that has
to do with the division of the product, not its amount.
The same material amount (not value) of fixed capital
THE EQUATION OF INTERNATIONAL DEMAND. 191
(and it is fixed capital which mainly concerns us here)
will employ the same amount of labor, of equal skill and
efficiency, in one country as it will in another. It is in-
deed true that a country in which the value of such capi-
tal is the least can produce manufactured goods at a cor-
respondingly smaller money cost, but that does not affect
the totality of the world's products, but only their divis-
ion. All variations in "the efficiency of capital" are
really variations in the efficiency of labor. Mill is more
accurate in his statement than Hicardo, but neither of
them is right. The limits of the fluctuations of the
equation of international exchange are the prices at
which the articles under consideration can be produced
in the exporting and in the importing country. As far
as such prices depend upon economic causes, such eco-
nomic causes do not include the " efficiency of capital,"
but are mainly the respective margins of cultivation, and
in some slight degree the rate of proportional wages ; but
sometimes, as in the case of England and India, moral
causes practically remove all limits by preventing the
accumulation of the capital necessary to the most advan-
tageous employment of labor. Mill and Ricardo them-
selves affirm that the limits I have claimed are the true
ones, and only assert the gain in efficiency to be also the
limit, because they consider the two to be identical. I
have already shown the absurd conclusions to which the
supposition of their identity leads.*
Now, the equation of international demand can not
cause imported food and raw products (cost of carriage,
etc., apart) to sell at a less price than the food and raw
produce raised at home, unless such food and raw prod-
uce are of a nature utterly unfitted for the national soil
* See chapter v, on " Free Trade and Protection."
9
192 CAPITAL AND POPULATION.
and climate, and are not raised at all by the importing
nation. The importing nation, nevertheless, obtains an
advantage by such importations, which it expends in rais-
ing its margin or increasing its population, but such ad-
vantage is not expressed at all by a difference of price as
affected by the equation we are considering. Trade with
an agricultural nation will, of course, lower the price of
food and raw prodiicts, but it will do so to exactly the
same extent, whether the equation be in favor of or
against the nation that imports them. How the equation
stands will show itself entirely in the price which such na-
tion obtains from the agricultural nations with which she
trades for the manufactures she exports, and that price
will vary between that at which she could afford to sell
the goods immediately after they were produced and the
price at which the country to which she exports her
goods could produce them at home. Now, if her margin
has been raised by the trade, she can not afford to sell
her goods at so low a price as before ; and if her margin
should be raised to nearly the same point as that of the
agricultural country, she could afford to sell her goods
at very little below the cost at which the agricultural
country could produce them herself. As her margin
approaches that of the other, the limits narrow within
which the equation can find an equilibrium, and, when
the margins became the same, trade would cease between
the two nations, except in those articles in which one or
the other of them possessed a natural advantage of soil or
climate, or an acquired advantage of skill. Each nation
would produce for herself both the raw produce and the
manufactured goods, in the production of which she la-
bored under no real disadvantage. Such a result could
only occur as a consequent of a comparative depopulation
THE EQUATION OF INTERNATIONAL DEMAND. ]93
of the manufacturing country. Although such depopula-
tion would result in a diminution of the gross amount of
its annual produce, the product jper cwpita might or might
not be increased. During all this process the equilibrium
of the equation might remain steady, as it is supposable,
for instance, that the manufacturing country might con-
tinue all the time to sell its exports at the lowest price at
which it could produce them, and, though the price of
such goods would constantly advance, the equilibrium
of the equation would not be thereby disturbed. The
equation itself would become more and more beneficial
to the agricultural country, but it could never attain more
than its just share of the benefit, and that at the expense
of the lowering of its margin.
But how can it be determined that the prices at which
goods are interchanged between nations are such that
neither suffers from its demand for the other's goods be-
ing greater than the demand of the other for its goods ?
Such a state of affairs exists when each nation pays for
its imports the price at which the other can afford to sell
them to it, with the ordinary profit, immediately after, or
at a corresponding and equal distance of time from, their
production. If either nation pays the other a greater
price than this, the equation is against it to exactly that
extent.
To make this point plain, let us suppose the- equation
to be against the agricultural country. This would enable
the manufacturing country to obtain more for her exports
than the price at which she could afford to sell them. It
would increase her manufacturing but not her agricult-
ural rate of profit. This would result in a transfer of
part of her labor from agriculture to manufactures. If
this raised her margin, the price at which she could pro-
194: CAPITAL AND POPULATION.
duce manufactured goods would finally be as great as that
she obtained for them, and the advantage gained would
no longer be expressed in the equation, but in her margin
of cultivation. If, however, her population increased to
such extent as to allow of no rise, or only a partial rise, in
her margin, it would appear that her rate of manufactur-
ing profit would be permanently greater than her rate of
agricultural profit — a manifest absurdity. The two rates
can not, of course, vary except for a short time. But the
price at which commodities sell is not wholly composed
of wages and the profits of fixed capital and active stock.
The profit of dead stock is as truly a component of price
as any of the others. The element of time that will prob-
ably elapse between the production and the sale of goods
is always considered by the producer as an element of
cost. The higher the price at which he can sell his com-
modity, other things being equal, the longer he will be
content to wait before selling it. When, therefore, the
equation of international demand is permanently in favor
of a manufacturing nation, the rate of manufacturing prof-
its will, in a short time, be no higher than before, but
the amount of dead stock which such nation can accumu-
late without depressing its industry will be greatly in-
creased. The benefit from the equation being in its favor,
will express itself, not in the rate but in the aggregate of
manufacturing profits.
I regard this result of the equation of international
demand as a very important principle of the science, and
for many reasons :
1. It affords a striking verification of the fact herein
claimed, that the whole tendency of the equation is to the
benefit of manufacturing nations, as it can not be disputed
that they are the ones who actually do possess the largest
THE EQUATION OF mTERNATIONAL DEMAND. 195
proportion of dead stock, and even if the reasons for such
tendency I have advanced are not valid, it rests with my
opponents to find reasons that are, as the result certainly
occurs.
2. It points to a deduction that must be made from
the benefit accruing under free trade to the productive
efficiency of the world — dead stock of itself is of no ad-
vantage. Any unnecessary increase in its permanent
amount is just so much subtracted from the sum of en-
joyed products, and is as much a loss to the world as if it
had been consumed by fire. The loss, indeed, is not very
great, but it is a real one. But the effect of permanent
increase of dead stock is to permanently lower real,
though not proportional wages, and it benefits capitalists
at the expense of the laborers, a very undesirable result.
3. It affords an economic explanation of the fact that
manufacturing are exclusively the lending nations of the
world. That they are so has hitherto been attributed to
moral causes, and the benefit derived has been regarded
as the well-merited reward of superior thrift, abstinence,
and industry, whereas it now appears to be a due effect of
the laws of international exchange, and a natural and in-
evitable result of the character of the national occupations
rather than of the industry and thriftiness with which
such occupations are pursued. The possession of this
large amount of dead stock affords at all times to manu-
facturing communities an available fund for foreign in-
vestment. It makes England the store-house and com-
mercial center of the world, and London the capital in
which nearly all large loans are raised. Whether or no a
proposed investment, promising a profit, shall be made,
depends almost wholly on the amount of idle funds be-
longing to those to whom the investment is proposed.
196 CAPITAL AND POPULATION.
The known fact that such funds exist is sure to afford to
their possessors the choice of all existing opportunities
for investment. They are thus enabled not only to select
the most promising of such opportunities, but are enabled
to very rapidly convert their dead stock into active capi-
tal, and thus prevent it from lowering prices and the
rate of profit. Accumulation can go on in such nations
more rapidly and for a longer time without depressing
industrial activity. Any race of men will accumulate
more in such circumstances than they would or could in
an agricultural status, wh*ere comparatively small accu-
mulations so depress the rate of profit that the fund from
which accumulations are made is immediately destroyed.*
* This brings us to the last of the counter-forces which check the down-
ward tendency of profit in a country whose capital increases faster than
that of its neighbors, and whose profits are therefore nearer to the mini-
mum. This is the perpetual overflow of capital into colonies of foreign
countries, to seek higher profits than can be obtained at home. I believe
this to have been for many years one of the principal causes by which the
decline of profits in England has been arrested. It has a twofold opera-
tion : In the first place, it does what a fire, or an inundation, or a commer-
cial crisis would have done ; it carries off a part of the increase of capital
from which the reduction of profits proceeds. Secondly, the capital so car-
ried off is not lost, but is chiefly employed either in founding colonies,
which become large exporters of cheap agricultural produce, or in extend-
ing and perhaps improving the agriculture of older communities. It is to
the emigration of English capital that we have chiefly to look for keeping
up a supply of cheap food and cheap materials of clothing, proportional to
the increase of our population ; thus enabling an increasing capital to find
employment in the country, without reduction of profit in producing manu-
factured articles with which to pay for this supply of raw produce. Thus,
the exportation of capital is an agent of great efficiency in extending the
field of employment for that which remains ; and it may be said truly that,
up to a certain point, the more capital we send away, the more we shall pos-
sess and be able to retain at home.
In countries which are further advanced in industry and population, and
have therefore a lower rate of profit than others, there is always, long be-
THE EQUATION OF IFTEENATIONAL DEMAND. 197
Not only are manufacturing nations, as a result of the
character of their industry, afforded opportunities for the
accumulation of capital far beyond those of their agricult-
ural neighbors, but they are enabled to usurp for them-
selves, by means of foreign investment, the few oppor-
tunities which are afforded to an agricultural people by
the nature of their occupation.
They are enabled to do this by the large amount of
funds, available for such investment, which are actually
forced into their possession by the tendency of the inter-
national equation in their favor, which tendency inevita-
bly increases their dead stock by necessarily increasing
the gross amount of their manufacturing profits in pro-
portion to their agricultural profits. As the rate of the
one can not but for a very short time exceed that of the
other, the two rates can only be brought together by an
increase in the amount of capital on which manufacturing
profits are paid. Under such circumstances any and
every people would accumulate, and it is absurd to praise
them for their thrift and abstinence in so doing.
fore the actual minimum is reached, a practical minimum, viz., when profits
have fallen so much below what they are elsewhere, that, were they to fall
lower, all further accumulations would go abroad. In the present state of
the industry of the world, when there is occasion, in any rich and improv-
ing country, to take the minimum of profits at all into consideration for
practical purposes, it is only this practical minimum that needs be consid-
ered. As long as there are old countries where capital increases very rap-
idly, and new countries where profit is still high, profits in the old countries
will not sink to the rate which would put a stop to accumulation. The fall
is stopped at the point which sends capital abroad. It is only, however, by
improvements in production, and even in the production of things consumed
by laborers, that the capital of a country like England is prevented from
speedily reaching that degree of lowness of profit which would cause all
further savings to be sent to find employment in the colonies, or in foreign
countries.
198 CAPITAL AND POPULATION.
Within the nation itself, the effect of this noraially
larger amount of dead stock is to lower real wages with-
out any disturbance of proportional. So far as the la-
borers consume manufactured goods, they pay for them
more than they would if the normal amount of dead
stock were less. Goods held for a year before they reach
the consumer will, in the long run and on the average,
cost him about ten per cent more than they otherwise
would, and whatever increment of cost is due to this
cause operates as a transfer of value, without equivalent,
from the consumers to the capitalists, and in so far as such
consumers are laborers they suffer a loss of real wages.
The possession of this normally large amount of dead
stock is not so much to be considered as itself a tax
upon the foreign consumer, as the form in which the tax
upon him, caused by the equation of international de-
mand being unfavorable, exj)resses itself and is gathered
by the nation that supplies him with manufactured goods ;
but it does enable such nation to lay a tribute upon him
in the shape of profits and interest upon loans and invest-
ments in his country that would else have been made from
home accumulations of dead stock, only possible to a
manufacturing country. This commercial tribute is very
great in amount, and is an addition to the other injuries
I have enumerated as resulting to an agricultural nation
from an unrestricted intercourse with manufacturing
ones.*
* " Before closing this discussion, it is fitting to point out in what man-
ner and degree the preceding conclusions are affected by the existence of
international payments not originating in commerce^ and for which no
equivalent in cither money or commodities is expected or received ; such as
a tribute, or remittances of rent to absentee landlords or of interest to for-
eign creditors, or a government expenditure abroad such as England incurs
in the management of some of her colonial dependencies. . . .
THE EQUATIO^N" OF INTERNATIONAL DEMAND. 199
No explanation of the fact that manufacturing are the
lending and agricultural the borrowing nations of the
world, other than that here given, is possible ; and the
verification of my claim, that the equation of interna-
tional demand is persistently unfavorable to agricultural
nations, is complete.
Fourthly, it aids in the explanation of the observed
fact, that, as nations grow in capitalized wealth, there is a
tendency for the normal rate of interest — the rate under
which capitalists are content to go on accumulating — to
be lowered. This tendency is, to a large extent, explica-
ble in the present state of the science, but the principle
here enunciated affords an additional reason why the fact
occurs : when the amount of dead stock is naturally larger
in one country than in another, fresh accumulations of
the same amount will form a smaller percentage of the
total, and will not affect the rate of profit so much as
when added to the accumulations of a nation whose
normal amount of dead stock is small. The tendency
" To begin with the case of barter. The supposed annual remittances
being made in commodities, and being exports for which there is to be no
return, it is no longer requisite that the imports and exports should pay for
one another; on the contrary, there must be an annual excess of exports
over imports, equal to the value of the remittance. If, before the country
became liable to the annual payment, foreign commerce was in its natural
state of equilibrium, it will now be necessary, for the purpose of effecting
the remittance, that foreign countries should be induced to take a greater
quantity of exports than before ; which can only be done by offering those
exports on cheaper terms, or, in other words, by paying dearer for foreign
commodities. The international values will so adjust themselves that either
by greater exports, or smaller imports, or both, the requisite excess on the
side of exports will be brought about ; and this excess will become the per-
manent state. The result is, that a country lohich makes regular payments
to foreign countries, besides losing wJiat it pays, loses also something more by
the less advantageous terms on which it is forced to exchange its productions
for foreign commodities.''^ — (Mill's "Principles.")
200 CAPITAL AND POPULATION.
to accumulate is thereby strengthened, as the risk of its
proving entirely useless is lessened, and the same amount
of accumulations has less effect in lowering the rate of
profit.
The existence of a normally large dead stock is an ele-
ment of security, and as such affects the desire to accumu-
late. Capitalists are always better content to invest in
securities affording a uniform return than in those afford-
ing a variable one, the same, or even somewhat greater,
in average amount. They will, therefore, be willing to
add more to a normally large dead stock than to a nor-
mally small one, even if thereby the rate of profit is
somewhat lessened. It is also to be noticed that, if the
equation of international demand remains as favorable as
before to the manufacturing nation, a lowering of the
rate of profit will not reduce the price at which it sells its
manufactured goods. Such price depends upon the equa-
tion and not upon the rate of profit ; but such lowering of
the rate of profit, as it can not lessen the aggregate of
manufacturing profits, will cause a further increase in the
normal amount of dead stock which the manufacturing
nation will hold and possess.
I desire to call attention to the explanation, afforded
by the principles and tendencies here enunciated, of an
otherwise inexplicable historical fact. I refer to the recent
and apparently permanent lowering of the rate of interest
and profits in the United States. Free-traders are accus-
tomed to assert that our undeniable prosperity under pro-
tection is owing to our great natural resources, and is in
spite of our fiscal policy and not due to it. They forget
that the gain in the efficiency of labor due to free trade
is in exact proportion to the agricultural advantages which
a nation possesses. The more fertile a nation is, there-
THE EQUATION OF INTERNATIONAL DEMAND. 201
fore, the greater should be her loss in adopting a pro-
tective policy, if they are right as to the effects of free
trade and protection upon the distribution of wealth.
Protection to manufactures should be more disastrous to
us than to nations whose manufacturing industries less
need protection. Their explanation is evidently faulty,
because our advantage in natural resources can not over-
balance our mistaken policy, if the results of that policy
are disastrous in proportion to our natural advantages.
The fact remains that we have prospered and are pros-
pering, and have succeeded in accumulating vast resources
in fixed capital and in active and dead stock, and that the
latter species of wealth has increased in greater propor-
tion than the other two. It is this latter fact that explains*
the permanent lowering of our normal rates of profit and
interest. The equation of international demand is no
longer against us. Our capital is replacing foreign cap-
ital, as is shown by the comparative decrease in our for-
eign obligations. We yet owe too much abroad, and
have as yet only begun to avail ourselves of foreign in-
vestment as an avenue for the escape of superabundant
means. But we are rapidly paying our debts, and are
commencing to invest in other countries, notably in Mex-
ico. By supplying ourselves with manufactured goods
we have lessened our demand for foreign goods, and are
obtaining those we yet require at cheaper rates and are
enjoying a vast increase of capitalized wealth and a very
great industrial activity. The efficiency of our labor is
undoubtedly somewhat lessened, but that the loss result-
ing from this has been more than made up to us by the
increased aggregate of our profits, by the increase in our
productive efficiency through the fuller employment of
our labor, and by the adjustment of the equation in our
202 CAPITAL AND POPULATION.
favor, can not be denied as an actually existing fact, and a
fact inexplicable on any other theories than those here
insisted upon. That much, if not all, of our prosperity
has been obtained at the expense of European nations,
England especially, is also self-evident. The develop-
ment of our railroads and water-ways and the discovery
of our ability to export live-stock and fresh meat have
cheapened agricultural produce to such extent that Eng-
land can no longer cultivate her poorest lands and pay
the same real wages as before. She is, therefore, obliged
to throw land out of cultivation, at the very time that she
must lower her margin of cultivation, if she would retain
her manufacturing supremacy, although the real wages of
her laboring classes are already so low that they can not
well be further reduced.
A party is arising in England antagonistic to free
trade. They demand " fair trade," by which they mean
protective duties on imports from those nations who dis-
criminate in their tariffs against the productions of Eng-
land. How futile, nay disastrous, such a policy will be,
can not fail to be appreciated by any one who has fol-
lowed the argument of this treatise. A nation with a
low margin of cultivation can not protect itself against
one with a high margin. It is absolutely helpless in the
matter of reprisals. Any attempt in that direction only
magnifies the injury. The sole advantage that a pro-
tective policy can afford is due to its diverting labor
from agriculture to manufactures. Protective duties in
England, leveled against an agricultural nation with
which she trades, can only result in the opposite direc-
tion, viz., the diversion of her industry from manufact-
ures to agriculture. This will render her vast capital
too great for her needs. It will depress the rate of profit.
THE EQUATION OF INTERNATIONAL DEMAND. 203
and lead to a corresponding cessation of industry. It
will divert her labor and capital to the employments that
will yield the least aggregate returns in wages and profits.
England's interests are advanced by free trade. Its gen-
eral adoption would enable her to appropriate to herself
great advantages at the expense of the nations with
which she trades, but there will some advantage remain
to her by adhering to that policy even when all the agri-
cultural nations, from whom she imports food and raw
produce, have excluded her own products. It is this
fact that has misled the English school of economists.
Their own national affairs are subserved by free trade
alone, and afford an apparently complete verification and
justification of the doctrine, when the interests of other
nations are unconsidered. It was very natural that Mill
and Ricardo should have given undue prominence to
the facts under their own eyes, and should have neg-
lected facts never presented in English experience ; and
as natural that American economists and statesmen
should have so largely refused to accept their conclusions,
despite their not being able to detect the logical flaw in
their arguments. The consideration of the tendency in
civilized nations for capital to be accumulated faster than
it can be utilized, even by a growing population, supplies
the logical premise needed, and explains as they never
have been explained the economic facts actually existent.
CHAPTEE XII.
DISTRIBUTION OF WEALTH IN A PROTECTED NATION.
Having now established on economic principles that
the policy of protection may augment the gross revenue
of an agricultural nation, the consideration naturally
arises as to what effect it will have upon the distribution
of such gross revenue between the two great classes of
laborers and capitalists. Philanthropic statesmen might
well hesitate to adopt a policy which made a nation
richer, partly at the expense of its working population.
Disparity of individual fortunes is the great curse of
modern society, and any advantage gained entirely at the
expense of increasing that disparity might well be fore-
gone. There are even some moral and social disadvan-
tages in such increase when it is not obtained at the
expense of those who have little, but solely from an aug-
mentation of the gross revenue of society. I at once
acknowledge that the policy of protection is open to this
latter objection ; but it is not, I think, to the former, al-
though that can not be so accurately determined. The
bulk of the benefit certainly goes to the increase of prof-
its, but some of it, I think, accrues to the wages-fund. I
will here consider the reasons for this conclusion.
It will be well first to notice a temporary benefit that
laborers receive immediately upon the adoption of the
"WEALTH DISTRIBUTION IN A PROTECTED NATION. 205
policy. The increase of capital necessitated by the di-
version of agricultural labor to manufactures raises the
rate of profit and lowers proportional wages, and real
wages also in so far as the laborer is a consumer of the
protected article. This effect upon real wages is, how-
ever, more than made up to the laborers as a class by the
increased employment that results from such a state of
affairs, and this increase of employment lasts until the
needed capital is accumulated, when proportional wages
advance to the same point as before and real wages also,
except as the laborer is a consumer of the protected arti-
cle, and the amount of employment is the same, other
things being equal, as it was originally. How much ad-
vantage this temporary increase of the wages-fund will
be to the laborer will depend upon the rapidity with
which the needed accumulations are made by the capital-
ists. If all the increased product is converted into capi-
tal, the increase of the wages-fund will be exactly equal
to the amount of such capital ; if only half, the benefit
to the laboring class will be twice that amount ; and if
only one tenth, ten times, subject of course to their loss
as consumers of the protected article. As a matter of
fact, it may perhaps be estimated that they gain about
five times the amount accumulated. This gain is, how-
ever, temporary, and of no permanent advantage to the
laborer, unless it leads him to advance his standard of
living, and it can hardly do this to any appreciable de-
gree. He suffers, eventually, a permanent loss as a con-
sumer of the protected article.
Several benefits obtained by him are, however, to be
offset against this loss. And it is hardly possible but that
he derives some net benefit from the policy when it
really leads to any considerable increase in the national
206 CAPITAL AND POPULATION.
production. Whether he retains the benefit will, of
course, depend, as do all other benefits conferred upon
him, upon his using it as an enhancement of individual
comfort, or as affording him an opportunity of marrying
earlier and having a more numerous family.
The diversion of labor from agriculture to manufact-
ures raises in some degree the margin of cultivation, and
this can not take place without a rise in real wages.
On account of the abundance of our fertile land, this has
little influence upon the American margin at the present
time, but we are rapidly nearing the point when it will
have a very important effect, as most of our best lands
are now under some sort of cultivation, and, the moment
we commence to take up land at all inferior to our best,
we will also feel the beneficial effect of the diversion
of our labor from tilling the soil.
Again, whatever increase in their wages skilled arti-
sans receive is an addition to the wages-fund of a very
real and important kind, although the benefit goes only
to a few of the class, and does not improve the condition
of the lowest class of laborers.
The benefit resulting from the increased employment
of females and youths is, however, a substantial addition
to the incomes of all classes of laborers, and one very con-
siderable in its amount; and one also that assists the
class in restraining the instinct that leads to a too rapid
increase of population.
There is also probably some benefit derived from the
greater diversity in the industries carried on by a pro-
tected people. I^ot only do laborers more easily find the
employment for which they are intellectually and phys-
ically best fitted, and in which, therefore, labor is less
onerous to them and more efficient in production, but the
WEALTH DISTRIBUTION IN" A PROTECTED NATION. 207
amount of employment is more uniform, as the greater
the variety of a nation's pursuits, the less liable are they
to be all depressed at the same time, and such variety is
in itself an education to the laborer, which spurs him to
strive for something better than his present lot.
The possessors of great wealth can not keep its enjoy-
ment wholly to themselves. The beauty of their resi-
dences and grounds gives pleasure to the eye of the
passer-by as well as to the owners, and the refinements
of life with which they surround themselves civilize and
refine their menials as well as themselves, though not, of
course, to the same degree. Life in a rich community is
far more attractive, and a better thing to the laborers,
than life in a poor and unkempt land, even if they pos-
sess no greater material comforts.
There is also a substantial advantage to the laboring
class in living in a community better able to protect itself
against its neighbors ; and, as Ricardo so conclusively
shows, the strength of a nation in war depends not upon
its gross but upon its net revenue.
It can not be doubted but that the sum of these ad-
vantages more than repays to the laborer the enhanced
price of the manufactured commodities he consumes, and
even that he can at any time recover by restraining popu-
lation. To some, though probably a slight degree, he is
benefited by protection. If he is not, the moral right
of the nation to take fifty cents from his pocket to give a
dollar to the capitalist may well be questioned, although,
even if that were the result, much might be advanced in
defense of such action. But it is not the result, and,
although capitalists reap nearly all the benefit of protec-
tion, some benefit undoubtedly is obtained by the work-
ing classes.
208 CAPITAL AND POPULATION.
The claim, so blatantly made about election-time, that
the purpose of protection is to protect American laborers
against the competition of " pauper labor," is, of course,
absurd, and can not be too strongly reprobated. To make
the laborers understand their true economic position is
the first duty of every student and teacher of political
and social economy, as it is only when they appreciate
the true conditions and limitations of their position that
the effort to raise the class by co-operation and the re-
straint of their instinct to over-populate can be at all
effectual. To confuse their minds by false economic
ideas is to do them the greatest possible injury.
The gross income of the class of capitalists can not
but be increased as the result of a protective policy, even
in the rare cases when it entails a positive loss to the
laborers. Even then some national advantages result.
.The refining influences of a wealthy class extend far be-
yond its own borders, and, as we have seen, the existence
of such a class in relatively large proportions adds greatly
to the offensive and defensive power of a nation — both
most desirable results.
The existence of such a class in larger proportion than
would occur under free trade will cause a further aug-
mentation of national wealth that I have not yet noticed.
Every increase of capital, needed in industry, being
created by the very demand, or rather by the otherwise
idle labor, which such demand utilizes, it follows that
every diversion of capital to uses which do not affect the
rate of profit is an addition to the possible wealth of a
people. Such species of wealth is that reserved for pro-
longed unproductive consumption.
The elegant residences, the public parks and build-
ings, the museums, the art-galleries, the places of amuse-
WEALTH DISTRIBUTION" IN A PROTECTED NATION. 209
ment, the sea-side resorts, all these, whatever their expense
to individuals, cost the nation nothing but labor that would
otherwise -be wasted. Such wealth affords no material
profit to the community, though it is more or less made
to yield a profit to individuals, but this merely affects the
distribution of wealth, not its creation ; none the less does
it yield a revenue, for it gratifies, without its own diminu-
tion, the very wants and desires the ultimate satisfaction
of which by material products alone gives value to mate-
rial products themselves. It is the noblest and best
wealth a nation can possess, while its cost to it is the
least.
But the amount of such wealth will always be regu-
lated more or less closely by the amount of capital which
a nation is able to employ productively. Any policy,
therefore, that increases such amount, even if it results
in no increase of the annual material product, will in-
crease the amount of this species of wealth and the
gratifications it annually and for all time yields. IN^ot
only will it be increased in proportion to the increase
of capitalized wealth, but in a greater proportion, as, the
larger the incomes of the rich are, the relatively more of
them will they devote to these purposes and to the more
refined and aesthetic enjoyments which they afford. N'o
nation can hope to advance beyond its fellows in culture,
refinement, and art, and in intellectual and aesthetic at-
tainments, that does not possess a very large proportion
of such wealth, and no agricultural nation ever has or
ever can possess such wealth in any considerable degree
so long as it confines its energies and restricts its capital
to the tilling of the soil.
CHAPTER XIII.
KENT.
RicAEDO says in his chapter on " Rent," page 40 :
" The rise of rent is always the effect of the increasing wealth
of the country, and of the difficulty of providing food for its aug-
mented 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. Kent increases most rapidly as the dis-
posable 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 labor, and where con-
sequently the progress of rent is slow."
Though in the main I agree with Ricardo in this
passage, except, of course, where he affirms that wealth
increases most rapidly where importation is least re-
stricted, the meaning would be clearer to me if Ricardo
had more accurately defined what he means by wealth.
Except as increase of wealth (however defined) increases
the demand for native food, it has no effect upon rent,
and rent may decline, even when population is increasing,
if the nation imports an additional proportion of its food-
supply.
Wealth may be intended to mean, and in the quoted
passage I take it as meaning, the aggregate wealth of the
community, or we may mean, by a wealthy country, one
whose wealth is great jper cajpita of its population. Or
EENT. 211
we may not, in using the term, refer to accumulations at
all, but to either the gross amount of the annual prod-
uct or the average amount ^6'/' capita. These four mean-
ings are very different, and the relations of wealth to
rent vary greatly according to which of the four mean-
ings we attach to the word. The proper aim of political
and social endeavor is to attain wealth in the last meaning
I have noted. In that sense an increase of wealth is
rather coincident with a fall than with a rise in rentals.
A rise in rent is the cause of an increase of accumu-
lations, because it enables a nation to divert more of its
labor to those industries which can utilize accumulations.
A rise in rent may therefore be a cause as well as a symp-
tom of wealth.
It is customary to regard rent as a transfer of wealth
from the consumer of food to the landlord, and this is
true of rent so far as it is due to the natural or acquired
fertility of the soil. But it has not been observed — at
least I do not remember that it has been observed — that
the rent due to propinquity to market is an exception to
this, in so far as the consumers of food at an enhanced
price are artisans. When this is the case, rent due to
propinquity is paid by the consumer of manufactured
goods. Food is always somewhat higher in towns and
cities than in the country, and, as a consequence of this,
lands near towns and cities bring a rental additional to
that due to their inherent or acquired fertility exactly,
in the long run, equal to such enhanced price due to the
saving in cost of carriage. When, therefore, proportional
and real wages of artisans and agricultural laborers are
the same, the money-wages of the artisans will be higher,
and this addition to their money-wages will enhance the
price of the goods they manufacture, and will finally be
212 CAPITAL AND POPULATION.
paid bj the consumer of those goods. It follows, there-
fore, that the consumer of any imported manufactured
article pays some rent to a foreign landlord, and that a
country that protects its manufactures escapes thereby
the payment of rent to foreigners.
If the industries that spring up in consequence of pro-
tection are concentrated in special localities to the same
degree as in the other country, the consumers of goods
do not save this rental. , If they concentrate in greater
degree, they may even pay more than they did before ;
and, if in lesser degree, less ; but, whatever the amount,
they pay it to their own countrymen.
The sum total of rentals due to propinquity is consid-
erable, and it is certainly better for a nation to pay it to
its own than to foreign landlords ; and this effect of pro-
tection, as far as it goes, is a valid argument in its favor.
The idea here expressed seems to be at the bottom of the
popular idea that a home is preferable to a foreign mar-
ket. That it is so has been instinctively felt, rather than
logically appreciated, but a consideration of the fact that
rent due to propinquity is an element of the cost of
goods shows that the popular idea is right, however illog-
ically held and expressed.
The beneficial influence of protection upon the rentals
due to fertility will not, of course, be denied by the most
enthusiastic free-traders. A diversion of industry in a
protected country from agriculture to manufactures can
not but occur, and this forces upon countries with which
it trades a corresponding and inverse diversion. Its
margin of cultivation is raised, its purely agricultural
rents lowered, and rentals due to propinquity increased.
This in some degree raises the average remuneration of
its labor and lowers its rentals, thus benefiting its laborers
RENT. 213
at the expense of its landlords. Such benefit, whatever
its amount, is in the more even distribution as well as the
creation of wealth, bettering the consumer at the land-
lord's expense, whereas the benefit derived from rentals
due to propinquity is an addition to national wealth at the
expense of the rentals of the landlords of other nations.
Where the benefits of the concentration of manufact-
ures are an offset or more than an offset to the increase
of rentals due to propinquity it may perhaps be technic-
ally incorrect to consider such rentals as part of the cost
of production of manufactured goods. That, however,
does not affect my argument, as in any case they are a
source of income, under free trade, to foreigners, which
protection enables us to appropriate to ourselves as con-
sumers or landlords.
The rentals yielded by water privileges, while not
strictly an element in the cost of production, are likewise
an additional income obtained by protection, which for-
merly pertained to those who supplied us with the pro-
tected goods.
While it is immaterial that the above sources of in-
come should be technically considered as an element of
cost of production, I must contend that they should be so
regarded. They do not, indeed, affect the price at which
different manufacturers can afford to produce, any more
than a difference in the rental paid by them affects the
relative price at which two different farmers can afford
to sell the products of their farms ; but as a rise in agri-
cultural rents varies the proportion in which raw produce
and goods will exchange, so also does a rise in manufact-
uring rentals increase the exchangeable value of goods as
compared with raw produce, and is in every sense an ele-
ment of their money cost and exchangeable value.
CHAPTEE XIY.
COMMEECE.
Foe the sake of simplicity, I have heretofore confined
the discussion to manufacturing and agricultural commu-
nities. A few words in reference to the relations of
both these to commercial nations is fitting in this place.
The four great divisions of human industry are agri-
culture, manufacturing, exchanging, and rendering serv-
ices. The latter does not here demand our considera-
tion, and we have already discussed the first two. Com-
merce, including by the term exchanges from place to
place as well as from producer to consumer, is the third.
There is, indeed, no inherent connection between ex-
changes from place to place and from producer to con-
sumer, but, as a matter of fact, the tendency is more or
less strong for the same class of individuals to engage in
both employments, though not so strong as for the nations
"which most largely engage in the carrying-trade to also
engage in effecting the exchanges of the goods they carry
between different peoples. This tendency in commercial
nations is greater if they are also manufacturing commu-
nities, as they then possess an additional amount of capi-
tal seeking investment, much of which will certainly find
its way to employment in effecting international inter-
change.
COMMERCE. 215
In its turn, a large amount of carrying-trade done by
a nation reacts to the benefit of its manufacturing indus-
tries, as it affords cheaper and quicker transit to its ex-
ports and imports. A large merchant marine and, still
more, regular steamship-lines to foreign ports, enable
a manufacturing community to monopolize markets in
which she has no other advantage, or would even be at
a disadvantage, if it were not for her better means of
communication.
Commerce, as a national industry, possesses advan-
tages over both agriculture and manufacture. Far back
as we may go in the history of the world, we invariably
find that the nations whose wealth, in proportion to their
population, was the greatest were distinctively commer-
cial peoples. Tyre, Sidon, Carthage, Yenice, Holland,
and finally England, are practical illustrations of the fact
asserted. The illustrations given are somewhat com-
plicated by the fact that, owing to the mutual stimulus
which the two forms of industry exert, the carrying na-
tions have, to a large extent, been manufacturing ones
also ; but still the fact is evident that those communities
have been the most prosperous who directed the greatest
proportion of their industry to commerce.
The main reason of this (those noticed above are only
secondary) can be gathered at once from the principles
we have been elucidating. Transferring and exchanging
commodities utilize more capital in proportion to the
labor employed than either branch of production proper.
The gross accumulations and the gross return in wages
and profits together are larger in it than in any other
forms of industry. It possesses, therefore, even greater
recommendations as a national employment than manu-
facturing.
216 CAPITAL AND POPULATION.
What are the causes which, under free trade, deter-
mine whether or not a nation shall engage in this form of
industry ? Everything, of course, which lowers or raises
the price at which she can afford to transport goods from
one place to another, or transfer them from the producer
to the consumer.
The money cost of transporting goods by any nation
will depend mainly upon the lowness of her margin of
cultivation ; the lower this is, the lower will be the real
and money wages of her navigators, and, what is of vastly
more importance, the lower will be the money cost of her
vessels as far as manufactures enter into such cost. The
money cost of raw products will be slightly greater, and
that of mineral products will depend upon the fertility
of her mines and the lowness of her margin as affecting
money- wages. As the cost of putting together is about
ninety per cent of the total cost of a vessel, the same
merchant marine will be much cheaper in money to
nations with low margins — although it will cost them a
slightly greater expenditure of labor on account of raw
produce forming a small ingredient of the total cost.
But, while a commercial country will be favored by a low
rate of real wages, she will be benefited by a high rate
of proportional wages, as they will not increase the
money value of her marine, while they will considerably
lessen the amount of the return her capitalists expect, or,
in other words, they will be willing to carry for a rate
yielding a smaller profit than they would if proportional
wages were lower.
But investment in the carrying-trade differs from that
in manufactures, not only in the proportion of its amount
to the labor employed, and in the proportion which fixed
capital bears to circulating, but also in the proportion in
COMMERCE. 217
which circulating capital wiU be divided between dead
and active stock. The owners of marine investment,
unlike manufacturers, can get no profit at all from dead
stock in their own business. Profit comes to them in
the form of money, and must be invested in fixed capital
(new vessels), or outside their business in some other em-
ployment, except, indeed, to the extent in which they
give credit for freights due, and this can never be consid-
erable. Their active stock is also relatively small, as they
employ but few laborers in proportion to the amount of
their business.
The other part of commerce, into which they in-
evitably drift, because in no other way can they so easily
get a profit from any dead stock they accumulate — viz.,
the purchase of foreign produce to hold for, and finally
to sell to, the home or foreign consumer — employs, on
the other hand, hardly any fixed capital or active stock.
Capital 80 used consists almost wholly of dead stock, but
of dead stock that yields a profit.
This hasty explanation of the nature of commerce,
inadequate as it is, will suffice for our present purpose,
which is to determine the relative advantage or disadvan-
tage of an agricultural nation doing her own carrying, or
allowing it to be done for her, as it inevitably must be,
if economic laws are allowed full sway. The reader can
not fail to see that this advantage or disadvantage can not
be ascertained from a comparison of the money cost of
doing it herself with what other nations will charge for
the service. The comparison must be between what
other nations charge and the money cost of the agricult-
ural labor which she must divert to the carrying-trade
to do it herself ; and that part of the cost, composed of
profits, must not be at all considered, as the capital to
218 CAPITAL AND POPULATION.
which such profits will accrue will be an addition to the
wealth of the country that will cost nothing except labor
that would otherwise be wasted in idleness. It can not
be doubted for a moment that even those nations who
enjoy the highest margin of cultivation will derive some
positive benefit from monopolizing all thej can of the
carrying-trade of the world, and that any loss in the
efficiency of labor they suffer, by diverting it from agri-
culture to commerce, is several times made up to them
in the form of profits.
But how can a nation protect its commerce ? It can
absolutely prohibit foreigners from engaging in its own
coasting-trade — and all or nearly all nations avail them-
selves of this opportunity, the free-traders as well as the
rest, antagonistic as it is to their principles ; but it can
not prohibit foreign vessels from bringing cargoes to or
taking them from its shores, neither can it impose a duty
or tonnage upon them for so doing. Retaliation here is
possible, as it is not to a manufacturing nation, against
whose products an agricultural nation discriminates. If
any nation should attempt this, other nations would pro-
hibit or tax her vessels, and a cessation of all trade would
result. An agricultural nation finds she can not induce
her people to engage in commerce unless they build their
own vessels ; but they can not do this profitably unless
she protects ship-building, and this places her ship-owners
at a further disadvantage in their competition with others.
In protecting manufactures she controls her own markets,
and that is sufficient to allow for a gainful diversion of
industry. In commerce also she controls part of her own
market, the coasting-trade ; but the advantages of engag-
ing in commerce are so great that the market she com-
mands is wholly insufficient for gaining all the advantage
COMMERCE. 219
possibly derived from commerce : she must, therefore,
subsidize — it is her only resource.
Curiously enough, the American people have stead-
fastly refused to adopt this course — mainly, indeed, for
moral reasons, because the corruption and legislative
bribery pretty sure to result from such a policy are rightly
odious to them. But they subsidize railroads with public
lands, and call upon consumers to pay over vast sums to
manufacturers, and with manifest benefit to themselves
as a people ; while they actually force American ships to
carry their mails at a positive loss, and refuse subsidies
to them in any way or shape, although no conceivable
investment of the public money would so augment the
total production of the country. Protectionists in prin-
ciple, we refuse protection to the very industry in which
it might yield to us the greatest benefits at the least cost.
ITo wonder our commerce has dwindled away to the van-
ishing-point, now that we have lost, by the substitution
of iron for wood in their construction, our natural advan-
tage in building ships. The loss of our commerce is a
very serious drag upon our national prosperity, in every
other respect so wisely fostered by our fiscal policy.
England, with the instinctive keenness in regard to her
own advantage which she always shows, despite her theo-
ries, has pursued a different course, and has heavily subsi-
dized her steamship lines, and none of her free-traders
lift an objecting voice to the policy. And yet, if protec-
tion is an economic mistake as applied to manufactures, it
is equally wrong as appUed to commerce. J^o reason can
be given that justifies the one that will not also justify the
other, though not, to be sure, to the same degree. Why
should the British nation so strenuously endeavor to mo-
nopolize this branch of industry, if there are no inherent
220 CAPITAL AND POPULATION.
advantages in one kind of industry over another not ex-
pressed bj tlie money cost at which they can be carried
on by native or by foreign labor and capital ? And if it
be once admitted that there are such inherent differences,
what becomes of the theory of free trade as applied to
the distribution of wealth among nations ?
In Book III, chapter xxv, section 5, Mill says :
" It is worth while also to notice another class of small but in
this case mostly independent communities, which have supported
and enriched themselves almost without any productions of their
own (except ships and marine equipments), by a mere carrying-trade,
and commerce of entrepot ; by buying the produce of one country
to sell it at a profit in another. Such were Venice and the Hanse
towns. The case of these communities is very simple : they made
themselves and their capital the instruments, not of production, but
of accomplishing exchanges between the productions of other coun-
tries. These exchanges are attended with an advantage to those
countries — an increase of the aggregate returns to industry — part of
which went to indemnify the agents for the necessary expense of
transport, and another part to remunerate the use of their capital
and mercantile skill. The countries themselves had not capital dis-
posable for the operation. When the Venetians became the agents
of the general commerce of Southern Europe, they had scarcely any
competitors ; the thing would not have been done at all without
them, and there was really no limit to their profits except the limit
to what the ignorant feudal nobility could and would give for the
unknown luxuries then first presented to their sight. At a later
period competition arose, and the profit of this operation, like that
of others, became amenable to natural laws. The carrying-trade
was tahen vp hy Holland^ a country with productions of its own and
a large accumulated capital. The other nations of Europe also had
now capital to spare, and were capable of conducting their foreign
trade for themselves ; hut Holland, having from a variety of circum-
stances a lower rate of profit at home, could afford to carry for other
countries at a smaller advance on the original cost of the goods than
would have leen required hy their own capitalists ; and Holland,
therefore, engrossed the greatest part of the carrying-trade of all
COMMERCE. 221
tlwse countries which did not Jceep it to themselves hy navigation laws
constructed, lilce those of England, for that express purpose.''''
Can one help tlie deduction, in tliis short epitome of
the transfer of commercial supremacy from nation to na-
tion, that wealth followed commerce as well as commerce
wealth, and that England owes her present commercial
position very largely to the protective policy of her navi-
gation laws and to her subsidies ?
The moral and intellectual advantages to a nation of
engaging in commerce are almost if not quite as great as
the material, and might well be purchased at a consider-
able sacrifice of the latter ; this, however, is somewhat
apart from the strict scientific aspect of the question, and
I will merely quote in this connection the following elo-
quent passage from the " Principles," Book III, chapter
xvii, section 5 :
" But the economical advantages of commerce are surpassed in
importance by those of its effects, which are intellectual and moral.
It is hardly possible to overrate the value, in the present low state
of human improvement, of placing human beings in contact with
persons dissimilar to themselves, and with modes of thought and
action unlike those with which they are familiar. Commerce is now
what war once was, the principal source of this contact. Commer-
cial adventurers from more advanced countries have generally been
the first civilizers of barbarians. And commerce is the purpose of
the far greater part of the communication which takes place between
civilized nations. Such communication has always been, and is pe-
culiarly in the present age, one of the primary sources of progress.
To human beings who, as hitherto educated, can scarcely cultivate
even a good quality without running it into a fault, it is indispensa-
ble to be perpetually comparing their own notions and customs with
the experience and example of persons in different circumstances
from themselves ; and there is no nation which does not need to
borrow from others, not merely particular arts or practices, but es-
sential points of character in which its own type is inferior. Fi-
222 CAPITAL AND POPULATION.
Dally, commerce first taught nations to see witb good-will the
wealth and prosperity of one another. Before, the patriot, unless
sufficiently advanced in culture to feel the world his country, wished
all countries weak, poor, and ill-governed but his own ; he now sees
in their wealth and progress a direct source of wealth and progress
to his own country. It is commerce which is rapidly rendering
war obsolete, by strengthening and multiplying the personal inter-
ests which are in natural opposition to it. And it may be said with-
out exaggeration that the great extent and rapid increase of inter-
national trade, in being the principal guarantee of the peace of the
world, is the great permanent security for the uninterrupted progress
of the ideas, the institutions, and the character of the human race."
It is a well-recognized principle that the good policy
of any proposed internal improvement does not wholly
depend upon its proving a paying investment. We sub-
sidize our railroads, and are proposing to do away with
tolls on the Erie Canal ; and who can doubt that the lat-
ter improvement would have added to the wealth of the
nation, even if it had not, as it has, paid its way ? Inter-
nal commerce has always enjoyed the fostering care of
the nation, and no one ventures to doubt the policy, how-
ever he may sometimes object to special applications of
it. But why should we divert our labor and capital from
more efficient to less efficient occupations ? For two
reasons: First, because great public works are mainly,
perhaps eventually wholly, an addition to the possible
wealth of the nation — they are equivalent to a destruc-
tion of some of its capital, which destruction is very soon
made whole by the natural action of human industry and
thrift, while the public works remain, and what utilities
and enjoyments they do subserve are just so much ad-
ditional to the real income of the people ; and, secondly,
because we perceive that the economic effect of no trade
or occupation is confined to itself alone, but ramifies
COMMERCE. 223
through all the arts and employments of the people. But
a small portion of the profits we derive from our railroads
accrues to their stockholders, or even to their directors.
The larger portion of benefit is realized by the travelers,
farmers, and merchants, who utilize the facilities they
afford. It is safe to say that there is not a bankrupt road
in our country that has not been a source of wealth to
many times the amount of its own cost. Here we have
indicated another advantage of a protective policy. The
interplay of benefit between the various occupations and
employments of men can not but be greater when their oc-
cupations and employments are most diversified. It is of
no advantage to a nation of farmers that additional land
should be reclaimed, but it is of advantage that machine-
shops should be built in their midst, independent of the
fact whether such shops can supply them with machinery
cheaper than they procured it before ; but nothing so
reacts upon other trades and employments as the estab-
lishment of means of communication. This commerce
effects, and thus confers, indirectly through agriculture
and manufactures, even greater benefits than it does di-
rectly through its own legitimate profits.
CHAPTER XY.
ULTIMATE EFFECTS OF FEEE TRADE AND PROTECTION.
I HAVE frankly admitted that free trade increases the
total efficiency of the labor of the world, and have only
differed from its advocates when they assert that all na-
tions who adopt the policy will derive some portion of
the benefit resulting from it. Based on this admission,
the objection will be formulated that the views here ad-
vanced are immoral, and that no nation has the right to
destroy a greater gain to the world to secure a lesser gain
to itself. It is to be feared that international morality
has not yet reached the stage in which nations will deny
themselves a selfish advantage to secure the ultimate good
of the race. 'None the less, however, is it their duty so
to do, and the adoption of a protective policy by an agri-
cultural nation is decidedly immoral, if it ultimately low-
ers the economic and social status of other nations more
than it benefits its own. That it does this at the time,
can not be denied, but whether it does so ultimately is
another question, on the resolution of which the morality
or immorality of a protective policy depends.
The ultimate and most desirable economic condition
of the globe is that population should be distributed
among the different countries in exact proportion to their
extent and fertility. The margin of cultivation would
then be everywhere the same, and the nature of the in-
EFFECTS OF FREE TRADE AND PROTECTION". 225
dustries, in which different people would engage, would
be fairly and naturally regulated by the natural advan-
tages of their soil and climate, both as to agriculture and
manufactures and the carrying on of commerce. An
advanced physical, intellectual, and moral people would
still possess advantages over less favored races, but they
would be advantages that belonged to it ; whereas, at
present, the more depressed the state of its laboring
population, the greater the advantage possessed by a
nation in the most desirable forms of industry. After
such ultimate distribution, for any nation to endeavor to
appropriate to itself, by a protective policy, more than the
share of such occupations that came to it, as the result
of an unrestricted commerce, would be entirely without
justification, and would necessarily react unfavorably
upon itself. Free trade would then secure to each peo-
ple all that they were entitled to of the fruits of industry.
There would be no distinctively agricultural, manufact-
uring, or commercial nations. Each people would pro-
duce for itself everything in the production of which its
labor was sufficiently efficient as compared with that of
its neighbors, and trade would be entirely in articles in
which one nation possessed over others some natural (not
artificial) advantage in soil, climate, or the character of
its people.
Free trade or protection is the morally best course
for nations to pursue, according as either tends to bring
about this ultimate and desirable equilibrium of human
affairs with the least cost of labor and the least loss of
annual production while it is being attained; and, yet
more important, that policy is most justifiable under which,
when the equilibrium is attained, the uniform and world-
wide margin of cultivation will be the highest.
226 CAPITAL AND POPULATION.
The ultimate equilibrium will be reached in three
ways, viz. : by the actual transfer of labor from over-
populated to under-populated lands, bj the peopling of
under-populated communities down to the margin of the
over-populated ; and, in some degree, it is to be hoped,
by the depopulation of over-pop nlated lands. The redis-
tribution of capital will automatically follow that of labor.
Protection supplies an artificial stimulus to all of these
methods, while free trade acts as a positive discouragement
to any transfer of labor and capital by any of them. The
former, therefore, hastens our approach to the ultimate and
desirable goal, while the latter greatly retards it. Free
trade between an agricultural and a manufacturing nation
tends to lower the margin of cultivation in the former
and raise it in the latter, without any transfer of popula-
tion. If population in both remains stationary, the two
peoples will finally possess the same margin, except as it
is caused to differ by the expense of transporting between
them the raw products and such manufactured goods as
are consumed by laborers, and that margin will finally
settle somewhere between their previous individual mar-
gins, and will be nearer to the high margin of the agri-
cultural or the low margin of the manufacturing country,
according to the amount of unoccupied fertile land which
the agricultural country possesses. If that amount is
great, the ultimate margin will be nearly as high as her
own previous one ; if small, it will be but little above the
previous margin of the more sterile land. When this state
is reached, further change will not occur. The popula-
tion of the sterile country will still be very much larger
in proportion to its fertility and extent than that of the
fertile ; and this will necessitate the importation of a large
proportion of its food and the exportation of many of the
EFFECTS OF FREE TRADE AND PROTECTIOK 227
manufactured goods required by tlie laborers of the fertile
land. The ultimate equilibrium attainable under free
trade, the average margin being the same, will not, there-
fore, be as beneficial to the world as the equilibrium that
will result from protection, because production in the for-
mer case will be saddled with the expense of a much great-
er expenditure of labor in transferring commodities and
raw products from place to place, and there will be a great
increase in the amount of dead stock that will necessarily
be held and stored up, which not only will cause an
unnecessary abstinence in its accumulation, but will cause
a larger share of the total product to accrue to the capital-
ists and a smaller to the laborers in both countries. The
final efficiency of labor will not be so great, and the
difference will not be a trivial one, but a very substantial
deduction from the sum of human enjoyments. But
population will not remain stationary. It will increase
in both lands. If such increase in both lands presses
equally upon the food-supply, the relative margins will
not be at all affected. They will both be lowered in an
equal degree, and the final equality in margin will never
be reached. If, however, as would actually be the case,
the population of the fertile increased somewhat more
rapidly than that of the sterile land, the two margins
would approach each other, but at a declining rate, and
the approach would probably cease while they were still
a considerable distance apart. Whether any margin of
cultivation shall advance or recede depends entirely upon
the amount of comforts and subsistence which contents
the laboring classes to such degree that they will consent
to increase, keep up, or decrease their numbers. It is
well settled that any sudden and great increase in real
wages wiU not be wholly expended in an increase of
228 CAPITAL AND POPULATION.
population, and that anj sudden and great decrease in
wages will to a very considerable degree lessen the num-
ber of marriages and births ; whereas a very gradual in-
crease in real wages will be mainly or fully lost to the
laborers by an increase in their number, while a very
gradual decrease in real wages will rarely, if ever, lead
to a decrease of population, but will result in the laborers
adapting their wants to a lower standard of life.
The first effect of large importations of cheap food
will be to considerably raise real wages and the margin
of cultivation, and this advantage will not be wholly lost
to the laborers because it is a great and sudden advantage.
The margin of cultivation in the country from which the
food is imported is lowered not only by the increase of
its own population, but by the increase of the population
of the manufacturing nations to whom it exports food, or
rather by the increase of the foreign manufacturing pop-
ulation that depend for their subsistence upon imported
food. The first effect of international intercourse to the
agricultural nation will, therefore, be to cause a consider-
able depression of the real wages of its laborers. This
depression, being great and sudden, will be resisted by its
laboring population refusing to increase at all, or at least
as rapidly as before. The first effects, therefore, of free
trade are to the restraint of the increase of the joint pop-
ulation of the two countries, and are a check upon the
lowering of their average margin of cultivation. The
population of the world will not so rapidly increase, and
the tendency will be for the population of the sterile
country to increase more rapidly than before, and for the
population of the fertile country to increase less rapidly ;
and the latter effect will be somewhat greater in amount
than the former. Free trade will confer a benefit upon
EFFECTS OF FREE TRADE AND PROTECTION. 229
the world in this respect in so far as it raises the average
margin, and a loss in cost of transport and dead stock
in so far as it increases or sustains the disparity in popu-
lation between different lands. At first the gain may
overbalance the loss, but finally the loss will be greater
than the gain.
As the two margins approach nearer and nearer to
each other, the rise in real wages in the sterile and the
fall in the fertile country will be more and more gradual.
When a point is reached where the laborer in the sterile
country uses the whole of the advantage gained in in-
creasing the population, the margin there will become
fixed, and the further approach of the two margins will
be entirely due to the laborers in the more fertile land
consenting to reduce the standard of life at which they
will continue to increase their numbers. If they finally
refuse to go on increasing before the two margins are
brought together, they will no longer approach each other,
but will remain permanently different. Under free trade,
therefore, the rate of approach will not only be slower
and slower as the margins approximate, but the approach
itself will wholly cease while they are yet a considerable
•distance apart. The ultimate equilibrium of margins will
not be coincident with uniformity of margin, and agri-
cultural nations can never look forward to the time, if
they neglect to adopt a protective policy, when they will
not be under some disadvantage in the carrying on of
those industries which possess the greatest inherent ad-
vantages. They must also deny themselves the moral
and political advantages of possessing a relatively large
population. The strength and dignity of nations depend
largely upon their numbers, and the ultimate distribution
of population under free trade can not but lessen the mili-
230 CAPITAL AND POPULATION.
tary power of agricultural peoples and their influence in
the councils of the world. To attain such power and in-
fluence has always been a proper national ambition, the
chief aim of diplomacy, and one of the most prominent
ends of political action. It is not, indeed, desirable if
obtained by a loss of net revenue, but only when the net
revenue remains the same or is in some degree increased.
But, as I have shown, protection certainly increases the
net national revenue of an agricultural nation as well as
its population, and under such circumstances the increase
of the latter is wholly beneficial, and an addition to the
motives for the adoption of a protective policy not here-
tofore noticed.
The immediate effect of the adoption of a protective
policy by an agricultural country is to raise its own mar-
gin of cultivation and depress the margin of the manu-
facturing nations with which it formerly traded. As
long as population remains stationary the margins can not
approach, nor will they if the increase be mutual and
equal, or rather in proportion to the fertility of the un-
occupied land. But the higher rate of real wages in the
agricultural country will act as a powerful stimulus to
population, and the lowered rate in the manufacturing as
a powerful deterrent. Nevertheless, the two margins will
never become identical if the laborers in the country with
the higher margin ultimately refuse to adopt as low a
standard of life as the laborers in the manufacturing
country. This they would probably do, and, as laborers
are more unwiUing to descend from, than eager to rise
above, their previous standard, the ultimate equilibrium
of margin will more nearly approach uniformity than
under free trade.
But the difference in margins will tend to adjust the
EFFECTS OF FREE TRADE AND PROTECTION. 231
population in another way. The greater it is, the greater
stimulus it will afford to emigration. A protected coun-
try will inevitably draw to its shores a greater number of
immigrants than before, not only because it can offer
them a substantial increase in their real wages, but be-
cause it can offer them a greater variety of employment.
This will also enable it to attract a better class of work-
men, those accustomed to earn and receive a higher than
the average wages. A skilled artisan who emigrates to
an unprotected country can only expect to be employed
there as a common laborer. The inducement to leave his
native land is very much lessened, and he will not come
at all unless the wages of common labor in such country
are greater than the wages which his skilled labor com-
mands in his own.
Protection no more than free trade secures, when the
final equilibrium is reached, a uniform and universal mar-
gin of cultivation, and does not therefore finally affect a
distribution of population among nations in exact propor-
tion to their extent and fertility, but it does this latter to
a much greater degree than free trade, and does it more
quickly. When the margins have approached each other
to the same degree as under free trade, the disparity in
population will not indeed be entirely overcome, but it
will be very much less than if a protective policy had not
been adopted. Under protection the disparity will be in
exact or nearly exact proportion to the difference in the
margins. Under free trade this will be only true of the
agricultural population. The sterile and over-populated
country will have in proportion to its fertility, besides its
somewhat greater agricultural population, a very much
larger manufacturing population. This will involve in
the ultimate state a very great increase in the cost of
232 CAPITAL AND POPULATION.
carriage between countries, and is far from being to the
world as beneficial as the more equal distribution of pop-
ulation effected by protection. Protection will not, in-
deed, wholly remove in the ultimate state the relative
disadvantage of agricultural nations in engaging in the
most advantageous employments, but it will lessen it
more than the policy of free- trade.
The ultimate state under protection is, therefore, in
several ways more desirable than that arrived at under
free trade, and will be sooner reached. The price paid
for this result is a present loss in the efficiency of the
labor of the world. Whether the result is fully worth
the price can not perhaps well be determined, but that it is
worth a large part of it can not surely be denied. To
whatever extent it is an equivalent, it morally justifies
the adoption of the policy by agricultural nations. It
must be noticed, also, that the loss in eflSciency is a con-
stantly declining one, and grows less exactly in proportion
to the more equal distribution of population. And where
such distribution is fully effected, the loss is turned into a
gain, the efficiency of labor being then greater by what-
ever saving is effected in cost of carriage and dead stock.
We have yet to consider whether the ultimate uniform
or average margin of cultivation will be higher or lower
if agricultural nations generally adopt the policy of pro-
tection. Although the determination of this point would
more powerfully affect our decision as to the morality of
protection than any of the results we have considered, I
do not see how it can be arrived at. Whether the mar-
gin shall be high or low depends mainly upon moral and
social causes, and is only dependent upon economic causes
in so far as they act upon the moral and intellectual status
of the population. I confess myself unable to see any
EFFECTS OF FREE TRADE AND PROTECTION. 233
effect upon the morality or intelligence of the laboring
classes of the world at large that can with certainty or
even probability be attributed to either free trade or pro-
tection, except that the latter causes those nations in
which the position of the laborer is the highest to become
wealthier and more powerful, while the former gives
power and influence to those in which the position of the
laborer is the lowest. This effect, however, I can not
but regard as very important, and practically decisive of
the question at issue.
The authority of Mill in the following passage would
seem to be in favor of the morality of protection, judged
by the standards here set forth. He says, in Book III,
chapter xvii, section 3 :
'* It is possible that one of the two coiintriea may be altogether
inferior to the other in productive capacities, and that its labor and
capital could be employed to greatest advantage by being removed
bodily to the other. The labor and capital which have been sunk
in rendering Holland habitable, would have produced a much greater
return if transported to America or Ireland. The produce of the
whole world w^ould be greater, or the labor less, than it is, if every-
thing were produced where there is the greatest absolute facility
for its production. But nations do not, at least in modern times,
emigrate en masse; and while the labor and capital of a country
remain in the country, they are most beneficially employed in pro-
ducing, for foreign markets as well as for its own, the things in
which it lies under the least disadvantage, if there be none in which
it possesses an advantage."
Ricardo also, iu his chapter on " Foreign Trades," page
77, takes the same view. Of course, neither of them rec-
ognize or could well recognize, holding the views they did
as to the nature of capital, that protection tended to the
readjustment of labor and capital they recognized as most
beneficial. They both reason as if labor and capital, es-
234 CAPITAL AND POPULATION".
pecially the latter, could only be transferred by actual
emigration, whereas this operates but to a very limited
extent. The real and effectual method of transfer from
one nation to another is, as to capital, its decline in one
country and increase in another, due to a change in their
relative rate of profit, and as to labor the restraint or
stimulus to population due to a change in their relative
margin of cultivation. They seem to regard both capital
and population, once acquired, in the light of natural in-
stead of artificial advantages, and never to have contem-
plated their readjustments as possible in the manner I
have indicated, although that is the manner by which the
readjustment is mainly effected.
Emigration, even when the emigrant is empty-handed,
causes of itself a transfer of capital from the mother to
the adopted country. By lessening the supply of labor
it raises proportional wages and lessens production and
accumulation in the former, and by increasing the supply
of labor it produces the contrary effect in the latter. It
makes but little, and that only a temporary difference,
whether or no immigrants bring with them the capital
necessary to their employment. Their presence alone,
whatever their poverty, allows of the creation of just the
amount of capital which their labor can utilize, and very
soon their adopted country is as rich as economic law al-
lows, and she can be no richer, however much wealth is
transferred bodily to her from other lands.
CHAPTER XYL
TAXATION.
The recognition of the tendency of capital to outstrip
population, not only affords a principle by which inter-
course with foreign nations should be regulated, but also
assists in determining the policy that should be pursued
in the internal affairs of a people, especially in so far as
such internal affairs relate to taxation. If there is a ten-
dency for accumulation, carried beyond a certain and fre-
quently recuiTing point, to lessen production, the effect of
such tendency can certainly be largely counteracted by a
judicious fiscal system. This being so, the principle that
as far as possible taxes should come from accumulations,
and not from wages, profits, or unproductive consumption,
is surely as important as any of the justly celebrated
principles enunciated by Adam Smith.
All direct taxation of profits as such, or indirect
through wages or upon unproductive consumption, to
such degree or in such manner as leads to a decrease in
the value unproductively consumed by the government
and the community combined, lessens the productive ca-
pacity of the nation, it may be, by an amount far greater
than that of the tax itself. It has hitherto been held
that taxes that lowered the rate of profit acted injuriously
only as they lessened the amount of the sum from which
236 CAPITAL AND POPULATION.
accumulations could continue to be made. But we have
seen tliat sucli accumulations would have gone first to in-
crease the dead stock or idle capital, and that the amount
of active stock or utilized capital, other things being
equal, varies inversely with the amount of dead stock.
This effect, therefore, would lead to an increased rather
than a decreased annual production. Such a tax is, in
fact, rarely or never followed by an increased production,
but it is not because of the consequent decrease of capi-
tal stock, active and passive together, but because the de-
crease in the rate of profit has lessened the amount of
capital that can be productively employed. It has de-
creased the normal ratio of active to dead stock, and the
failure to accumulate further only partially counteracts
the consequent disproportion between them.
In countries where population tends to outstrip capi-
tal, a tax on profits does, indeed, discourage production,
as well by the consequent decrease in capital as by the
accompanying decrease in the rate of profit ; but where
the tendency is the other way, the first result, instead of
intensifying, counteracts the second, and finally readjusts
the equilibrium of active to dead stock to a new and
lower ratio.
Taxes, on the other hand, that are paid wholly from
funds that would otherwise have been added to capital,
provided, of course, they are not so great as to cause the
increase of capital to lag behind that of population, are
met entirely by an increase of production. If such taxes
had not been levied, the same amount of production
might have gone on for a while ; but the resulting ac-
cumulations would have been added to dead stock, and
been followed very soon by a decrease in the amount of
stock productively employed, and the total production
TAXATION.
:si
would have eventually been lessened. The normal ratio
between dead and active stock can only be readjusted
by a decrease of production, or by an increase of un-
productive consumption. A tax drawn wholly from
accumulations, being really an increase of unproductive
consumption, adjusts it in the latter, and much the more
advantageous, way. When such a tax is wisely expended
it is an unmixed advantage to the nation, and even when
unwisely used it is of no positive disadvantage.
We are entitled, then, to lay it down, not only as a,
but as the, fundamental pHnciple of taxation, that it
should come as far as possible from funds that would
otherwise be added to capital ; but in effecting this it
must be done without affecting the rate of profit, as the
effect of lowering that will overbalance the advantage of
lessening accumulations.
To reach this fund, from which taxation should
wholly come, is a very difficult matter, because every
individual on whom taxation falls seeks to meet it, not
from the funds he is accustomed or desirous of adding
to his capital, but from those he devotes to unproduc-
tive consumption. Personal interests here are in direct
conflict with social, with the result that a theoretically
perfect system of taxation is impossible of attainment,
especially as the tax which comes nearest in principle to
the correct one, and from which any considerable revenue
can be raised, is open to very serious moral objections,
and to most minds seems to discriminate very unjustly
between individuals. I refer, of course, to a graduated
income-tax. A tax upon incomes strictly proportional
is a tax upon profits, and therefore" objectionable. In so
far as it is a tax upon wages, unless indeed they are ex-
ceptionally high, it is, of course, transferred eventually
238 CAPITAL AJTD POPULATION.
to profits, and can not but result in a decrease of pro-
duction ; but, where small incomes are wholly exempt,
and moderate incomes but lightly taxed, the weight of
the tax falls almost wholly upon the accumulating class,
and that very nearly in proportion to their ability and
willingness to accumulate. This has hitherto been ad-
vanced as a fatal objection to such a tax both economic-
ally and morally. We have seen that economically it is
not unwise, but, on the contrary, most beneficial to the
interests of the community at large, and it is certainly
just and right that the class whose advancement of their
individual interest most conflicts with the interests of
society should be called upon to bear very much more
of the public burdens than would otherwise fall to them,
especially when their so doing will partially, and may
even wholly, obliterate the injurious effects to others of
their hitherto too rapid growth in wealth, and that with-
out any diminution, but rather to the increase, of their
wealth as a class, although the distribution of their wealth
among themselves will be affected. Anything that in-
creases the average annual production increases in some
proportion the capital that can be utilized, and conse-
quently the amount that can be accumulated ; and that
capital should be more equally distributed has long been
recognized as a desirable social change. The objections
to a graduated income-tax are therefore reduced solely
to its inquisitorial nature, and to the deceit and perjury
consequent upon the conflict of individual and social
interests. Great as these objections are, they do not
seem insuperable when the economic action of such a
tax is considered.
A legacy-tax, graduated or not, but better if gradu-
ated, also meets the conditions of the principle that taxa-
TAXATION. 239
tion should be drawn from accumulations, and is not open
to the same moral objections. A tax upon gifts above a
certain amount would not only be economically advisable,
but probably necessary, to prevent evasions of taxes upon
legacies and inheritances, and also, perhaps, upon income.
In the following passage from Mill, Book Y, chapter
ii, section 7, it would certainly seem that he fully in-
dorses the views here advanced. I am unable to put any
construction on his language other than that he means to
assert that, in England at least, capital so presses upon
population that taxes on capital are fully paid by a saving
of the waste of capital that would else occur ; nor am I
able to imagine any more complete admission than this,
that over-accumulation is not only possible, but an event
of frequent and periodical occurrence, in civilized com-
munities. Mill, indeed, did not perceive that over-accu-
mulations are not only necessarily wasted, but that they
involve a partial cessation of industry while such waste is
taking place and until it is accomplished. Other than
this last particular his views certainly seem to coincide
with mine. The passage reads :
"All taxes, therefore, are in some sense partly paid out of capi-
tal ; and in a poor country it is impossible to impose any tax which
will not impede the increase of the national wealth. But in a coun-
try where capital abounds and the spirit of accumulation is strong,
this effect of taxation is scarcely felt. Capital having reached the
stage in which, were it not for a perpetual succession of improve-
ments in production, any further increase would soon be stopped,
and having so strong a tendency even to outrun those improvements,
that profits are only kept above the minimum by emigration of cap-
ital, or by a periodical sweep called a commercial crisis — to take
from capital by taxation what emigration would remove or a com-
mercial crisis destroy, is only to do what either of those causes
would have done, namely, to make a clear space for further saving.
" I can not, therefore, attach any importance, in a wealthy coun-
11
240 CAPITAL AND POPULATION.
try, to the objection made against taxes on legacies and inheritances,
that they are taxes on capital. It is perfectly true that they are so.
As Ricardo observes, if £100 are taken from any one in a tax on
houses or on wine, he will probably save it, or a part of it, by living
in a cheaper house, consuming less wine, or retrenching from some
other of his expenses ; but if the same sum be taken from him be-
cause he has received a legacy of £1,000, he considers the legacy as
only £900, and feels no more inducement than at any other time
(probably feels rather less inducement) to economize in his expend-
iture. The tax, therefore, is wholly paid out of capital ; and there
are countries in which this would be a serious objection. But, in
the first place, the argument can not apply to any country which
has a national debt, and devotes any portion of revenue to paying it
off; since the produce of the tax, thus applied, still remains capital,
and is merely transferred from the tax-payer to the fund-holder.
But the objection is never applicable in a country which increases
rapidly in wealth. The amount which would be derived, even from
a very high legacy-duty in each year, is but a small fraction of the
annual increase of capital in such a country ; and its abstraction
would but make room for saving to an equivalent amount ; while
the effect of not taking it, is to prevent that amount of saving, or
cause the savings, when made, to be sent abroad for investment. A
country which, like England, accumulates capital not only for itself
but for half the world, may be said to defray the whole of its public
expenses from its overflowings ; and its wealth is probably at this
moment as great as if it had no taxes at all. What its taxes really
do is to subtract from its means not of production but of enjoy-
ment ; since whatever any one pays in taxes he could, if it were not
taken for that purpose, employ in indulging his ease or in gratifying
some want or taste which at present remains unsatisfied."
If Mill had borne in mind and fully considered the
above words and all that they imply, he could hardly
have expressed himself as he does later on in Book Y,
chapter ii, section 3, in which he says :
"Both in England and on the Continent a graduated property-
tax has been advocated on the avowed ground that the state should
use the instrument of taxation as a means of mitigating the inequal-
TAXATIOK 241
ities of wealth. I am as desirous as any one that means should be
taken to dimmish those inequalities, but not so as to relieve the
prodigal at the expense of the prudent. To tax the larger incomes
at a MgJier percentage than the smaller^ is to lay a tax on indnstri/
and economy ; to impose a penalty on people for hating worTced
harder and saved more than their neighbors. It is not the fortunes
which are earned^ tut those which are unearned^ that it is for the
public good to place under limitation. A just and wise legislation
would abstain from holding out motives for dissipating rather than
saving the earnings of honest exertion. Its impartiality between
competitors would consist in endeavoring that they should all start
fair, and not in hanging a weight upon the swift to diminish the
distance between them and the slow. Many, indeed, fail with
greater efforts than those with which others succeed, not from dif-
ference of merits but difference of opportunities ; but if all were
done which it would be in the power of a good government to do,
by instruction and by legislation, to diminish this inequality of op-
portunities, the difference of fortune arising from people's own earn-
ings could not justly give umbrage. With respect to the large for-
tunes acquired by gift or inheritance, the power of bequeathing is
one of those privileges of propercy which are fit subjects for regu-
lation on grounds of general expediency ; and I have already sug-
gested, as a possible mode of restraining the accumulation of large
fortunes in the hands of those who have not earned them by exer-
tion, a limitation of the amount which any one person should be
permitted to acquire by gift, bequest, or inheritance. Apart from
this, and from the proposal of Bentham (also discussed in a former
chapter),* that collateral inheritance in case of intestacy should
cease and the property escheat to the state, I conceive that inherit-
ances and legacies, exceeding a certain amount, are highly proper
subjects for taxation, and that the revenue from them should be as
great as it can be made without giving rise to evasions, by donation
during life or concealment of property such as it would be impos-
sible adequately to check. The principle of graduation (as it is
called), that is, of levying a larger percentage on a larger sum,
though its application to general taxation would be in my opinion
objectionable, seems to me both just and expedient as applied to
legacy and inheritance duties."
* Supra^ Book II, chapter ii.
2J:2 CAPITAL AND POPULATION.
In one passage lie objects to a tax, in that it tends to
discourage accumulation ; and in the other he rebuts the
same objection against another tax, on the ground that
such accumulations will inevitably be wasted. But there
are not the moral objections he urges to a graduated tax
upon property and incomes, or upon inheritances, legacies,
and gifts. The tendency of such taxes is to discourage
accumulation, which, if not carried too far, is an unmixed
benefit. Their imposition tends not only to a more equal
distribution of wealth, but also to the prolongation of
the periods of large productiveness. As great accumu-
lations take away from the poorer members of a commu-
nity something of their ability to themselves accumulate,
it certainly seems just that those whom society protects
in inflicting an injury upon itself should be called upon
to support more than their share, if not all, of the public
burdens. There is one peculiar advantage possessed by
such a tax which should be noticed, viz., that the com-
munity, including those who pay it, will be richer instead
of poorer by it, even if the proceeds of the tax be wasted.
The increase of industry to which it leads will add more
to the general income than the tax itself will subtract
from it, because only a part of such increased produc-
tion will be added to savings, while the tax is wholly a
deduction from past accumulations. The conditions,
therefore, favorable to a large production will be pro-
longed.
In his discussion of the income-tax, which follows the
passage we have quoted, Mill argues in favor of exempt-
ing such a proportion of life-incomes from taxation as
would probably be saved. This would indeed be a bene-
fit to the families of annuitants, as it would help to pro-
vide for them after the death of the annuitant, but its
TAXATION. 243
effect upon accumulation would be against the interest of
the public, instead of in favor of it, as Mill supposes.
Taxes upon rental also meet economic conditions, as
the unproductive consumption of the government exactly
takes the place of the lessened unproductive consumption
of the landlords, and therefore, while lessening accumula-
tion, they do not otherwise affect the rate of profit. Mr.
Henry George seems to think that a sum could be derived
from this source sufficient, not only to meet all the ex-
penses of government, but to allow a vastly increased ex-
penditure by government for social improvement. That
a large sum could be so derived admits of no doubt, but
that Mr. George considerably exaggerates the amount is
also evident. Economic rent is but a small portion of
what is ordinarily called rent. A tax upon aggregate rent
would be mainly a tax upon profits, and would discourage
agricultural and urban improvement, nor do I understand
Mr. George to advocate it ; but the rent of agricultural
land is very largely composed of the profits due to the
improvements upon it. It is only of town-lots and villa-
sites that economic rent furnishes a large proportion of
the rental in the popular sense of the word. If, however,
the whole of economic rents were reappropriated by so-
ciety, it would undoubtedly afford a revenue, which would
obviate any necessity of taxing profits in any way or
shape, and the economic advantages resulting from this
would be very great. I agree with Mr. George that so-
ciety would be justified in resuming its right to the entire
economic rental of its land, but can not regard his pro-
posal to do so immediately and without compensation as
anything but the most arbitrary confiscation. Society
has parted with its rights in the premises for valuable
though inadequate compensation, and though we may
24A CAPITAL AND POPULATION.
allow that one generation can not grant rights of this
character belonging to its successors, it certainly can,
if it chooses, part with its own. Immediate resumption
of economic rentals without full compensation would
therefore be most unjust, and the violation of an implied
contract. More, however, can be said in favor of a grad-
ual resumption without compensation. The past and the
present rights are gone. However inadequate the price,
the bargain has been made and must be adhered to, but
the grant may be held void as to the generation coming
into being, and there would be no injustice in a law re-
suming the proprietary right to the rental of each future
year, in proportion to the ratio of the inhabitants of the
country born after its passage to those born before. Such
a gradual resumption would work neither hardshi]3 nor
injustice, and would in time attain for us all the advan-
tages that a sudden and unjust resumption could do, and
that without the shock to society that would follow a
sudden resumption with or without compensation.
Mr. George entirely miscalculates the effect upon
" progress and poverty " that would follow the resump-
tion of economic rent by the government. It would
make no difference in the price of food or of manufact-
ured articles whether the farmer and the manufacturer
paid the rental to the government, to the landlords, or to
themselves as landlords. The sole relief that would ac-
crue would be the consequent relief from other taxation.
But the laborer is not, indeed can not be, taxed ; at first,
probably, he would reap some benefit as a consumer in so
far as taxation is an element of cost ; but as soon as popu-
lation had increased, his real wages would be the same as
before, and the whole benefit derived from the decrease
of other taxation would accrue to his employers by ena-
TAXATION. 245
bling them to utilize a larger amount of capital. The
final result would simply be a transfer from landlords to
capitalists, and an increase in the inequality of individual
fortunes.
The position of the laborer can be permanently im-
proved in but two ways : first and mainly, by his refrain-
ing from increasing population ; and, secondly, by such a
readjustment of social forces as shall result in his stead-
ier and more efficient employment.
While to some extent agreeing with Mr. George, I
can not therefore look hopefully upon his proposed expe-
dient for ameliorating the condition of laborers. I do
not, however, despair of their future state, because I see
in co-operation the solution, and the only final solution,
of the conflict between labor and capital. "While its im-
mediate success can not be expected, because it presup-
poses an intelligence and morality not yet attained by our
lower classes, its gradual adoption is certain to take place,
small as is the foothold it has yet obtained, because it
contains within itself an educative principle that will
eventually supply the needed intelligence and morality.
Taxes on necessaries can not but lower the rate of
profit, and are always unwise. Taxes on luxuries may or
may not lower the rate of profit. If they lead to an in-
crease in the value of what is unproductively consumed,
they will raise and sustain the rate, and will act benefi-
cially. If they lead to a decrease of unproductive con-
sumption, they will decrease the rate of profit, and wdll
eventually lessen industrial activity. When they are
laid on a few articles and are excessive in amount, they
may sometimes do the latter, but when laid upon many
articles their operation is similar to that of a graduated
income-tax. As the proportion of income spent in luxu-
246 CAPITAL AND POPULATION.
ries is largest, as a general rule, in large incomes, such
taxes curtail the amount of the funds from which accu-
mulations are ordinarily made, and lead to an increase of
industrial activity ; but they are much inferior in their
action to a graduated income-tax, because they do not
operate heavily enough against the large incomes, and
because many of the rich escape their due proportion of
them by unduly curtailing their expenditure. These are
pre-eminently the accumulating class, and the one that
the good of society demands should be most heavily
taxed. But, just in proportion as they monopolize the
avenues of investment to the exclusion of their fellow-
citizens, for which privilege they should certainly be
made to pay, do they escape the taxes upon luxuries.
The special advantage of taxing luxuries is that, as in the
main, luxurious expenditure increases in greater propor-
tion than income, it is really a slightly graduated tax upon
incomes. If such taxes are relied upon, a somewhat
heavier tax, according to our principles, should be laid
upon the excess of income above expenditure.
Perhaps no better test of the correctness of the prin-
ciples advocated in this work, as compared with Mill's
views, can be found than the effect produced upon a na-
tion's industry by its engaging in war, with the consequent
increase in loans and taxes.
To obtain Mill's views I make the following extract
from Book Y, chapter vii, section 1 :
*' Section 1. The question must now be considered how far it is
right or expedient to raise money for the purposes of government,
not by laying on taxes to the amount required, but by taking a por-
tion of the capital of the country in the form of a loan and charg-
ing the public revenue with only the interest. Nothing need be
said about providing for temporal wants by taking up money ; for
instance, by an issue of exchequer bills, destined to be paid off at
TAXATION. 247
farthest in a year or two, from the proceeds of the existing taxes.
This is a convenient expedient, and, when the government does not
possess a treasure or hoard, is often a necessary one, on the occur-
rence of extraordinary expenses, or of a temporary failure in the
ordinary sources of revenue. What we have to discuss is the pro-
priety of contracting a national debt of a permanent character;
defraying the expenses of a war or of any season of difficulty by
loans, to be redeemed either very gradually and at a distant period,
or not at all.
" This question has already been touched upon in the first book.*
We remarked that if the capital taken in loans is abstracted from
funds either engaged in production or destined to he employed in it,
their diversion from that purpose is equivalent to taking the amount
from the wages of the laboring classes. Borrowing, in this case, is
not a substitute for raising the supplies within the year. A govern-
ment which borrows does actually take the amount within the year^
and that too hy a tax exclusively on the laboring classes — than which
it could have done nothing worse if it had supplied its wants by
avowed taxation; and in that case the transaction and its evils would
have ended with the emergen/^y ; while by the circuitous mode adopted
the value exacted from the laborers is gained, not by the state, but by
the employers of labor, the state remaining charged with the debt
besides, and with its interests in perpetuity. The system of public
loans, in such circumstances, may be pronounced the very worst
which, in the present state of civilization, is still included in the
catalogue of financial expedients.
" We, however, remarked that there are other circumstances in
which loans are not chargeable with these pernicious consequences,
namely : first, when what is borrowed is foreign capital, the over-
flowings of the general accumulations of the world ; or, secondly,
when it is capital which either would not have been saved at all un-
less this mode of investment had been open to it, or after being
saved would have been wasted in unproductive enterprises or sent
to seek employment in foreign countries. When the progress of
accumulation has reduced profits either to the ultimate or to the
practical minimum — to the rate, less than which would either put a
stop to the increase of capital, or send the whole of the new accu-
* Supra, p. 49.
2i8 CAPITAL AND POPULATION.
mulations abroad — government may annually intercept these new
accumulations without trenching on the employment or wages of
the laboring classes in the country itself, or i)erhaps in any other
country. To this extent, therefore, the loan system may be carried
without being liable to the utter and peremptory condemnation which
is due to it when it overpasses this limit. What is wanted is an in-
dex to determine whether, in any given series of years, as during
the last great war, for example, the limit has been exceeded or not."
We have nothing to do here with the question as to
the advisability of loans, but with the assertion, in the
sentences italicized, that such loans are entirely at the ex-
pense of the laboring class, if they raise the rate of profit
and depress proportional wages. According to Mill, when
such loans are made, they should be followed by some
cessation of industry. Is this, in fact, what occurs ? Can
it be denied that the laboring class is especially prosper-
ous under such circumstances ? Mill himself does not
attempt to deny it, but endeavors to explain it away in
the succeeding paragraph. He says :
^^ Such an index exists, at once a certain and obvious one. Did
the government hy its loan operations augment the rate of interest ?
If it only opened a channel for capital which would not otherwise
have been accumulated, or which, if accumulated, would not have
been employed within the country, this implies that the capital
which the government took and expended could not have found
employment at the existing rate of interest. So long as the loans
do no more than absorb this surplus, they prevent any tendency to a
fall of the rate of interest, but they can not occasion any rise.
When they do raise the rate of interest, as they did in a most ex-
traordinary degree during the French war, this is positive proof that
the government is a competitor for capital with the ordinary channels
of productive investment, and is carrying off not merely funds which
would not, but funds which would have found productive employment
within the country. To the full extent, therefore, to which the loans
of government during the war caused the rate of interest to exceed
what it was before, and what it has been since, those loans are charge^
TAXATION. 249
able with all the evils which have been described. If it be objected
that interest only rose because 'profits rose^ I reply that this does not
weaTcen but strengthens the argument. If the government loans
produce the rise of profits by the great amount of capital which
they absorb, by what means can they have had this effect unless
by lowering the wages of labor ? It will perhaps be said that what
kept profits high during the war was not the drafts made on the
national capital by the loans, but the rapid progress of industrial
improvements. This, in a great measure, was the fact, and it no
doubt alleviated the hardship to the laboring classes, and made the
financial system which was pursued less actively mischievous, but
not less contrary to principle. These very improvements in indus-
try made room for a large amount of capital ; and the government,
by draining away a great part of the annual accumulations, did not
indeed prevent that capital from existing ultimately (for it started
into existence with great rapidity after peace), but prevented it
from existing at the time, and subtracted just so much while the
war lasted from distribution among productive laborers. If the
government had abstained from taking this capital by loan, and had
allowed it to reach the laborers, but had raised the supplies which
it required by a direct tax on the laboring classes, it would have
produced (in every respect but the expense and inconvenience of col-
lecting the tax) the very same economical effects which it did pro-
duce, except that we should not now have had the debt. The course
it actually took was therefore worse than the very worst mode which
it could possibly have adopted of raising the supplies within the
year ; and the only excuse or Justification which it admits of (so far
as that excuse could be truly pleaded) was hard necessity — the im-
possibility of raising so enormous an annual sum by taxation, without
resorting to taxes which, from their odiousness or from the facility
of evasion, it would have been found impracticable to impose."
This explanation, which, of course, I do not at all allow
to be a valid one, at the best is only that of one particular
occurrence of the fact so antagonistic to his theories.
How lame and impotent it is, is apparent when it is re-
membered that an increase of industrial activity always
occurs in nations while at war ; and the higher the war
250 CAPITAL AM) POPULATION.
expenditures and loans force the rate of interest and of
profit, provided, of course, that the security of capital is not
imperiled by invasion, the greater the industrial activity
whenever the drain of capital is greater than the drain
of labor to the army. When the drain of the latter is the
greater, the contrary effect always has been produced.
The reasoning is utterly oblivious of the fact that the
benefit which the laboring class receives from capital is
solely from such portion of the gross capital as is actively
employed in production. Dead stock can not be convert-
ed into wages until it becomes active, and the larger the
amount of dead stock the less the temptation to capitalists
to employ it productively. The drain upon dead stock
made by the government loans in time of war, even
when it is far greater than what would carry off the
sums that would otherwise be loaned abroad or consumed
in speculation, is of great and immediate advantage to the
laborers. Productive consumption is vastly increased,
and the wages-fund consequently enlarged. There is a
fall of proportional wages, but the fall of proportional
wages is more than made up to the laborers by more of
them being kept busy. This accounts for what has hith-
erto been somewhat of a puzzle to economists, the excep-
tional prosperity of a country engaged in war, and the
continuance of that prosperity after the war is closed,
if the increased industry has not already repaired the
breaches which the war expenditure has made in capital.
The advantage to labor would be greater if it were not for
the drain upon their numbers by enlistment and draft.
This operates as a counterbalance to the drain of capital,
and if it equals or exceeds it, either no increase or a de-
crease of industrial activity will ensue, because it will
raise wages and lessen the wages-fund.
CHAPTEK XVII.
SOME OTHER EFFECTS OF THE LAW.
The recognition that capital is limited by popula-
tion and tends constantly to overpass such Hmit, will
go far toward the solution of many other eagerly-dis-
cussed problems.
The effect of the creation, the funding, and the repay-
ment of national indebtedness upon production and dis-
tribution, is such a problem. Some have gone so far as
to assert a national debt to be a national blessing ; and to
a certain degree the assertion can be sustained. Besides
the national securities being so readily negotiable and so
satisfactory as collaterals, that their presence materially
aids the efficiency of the credit system, it may also be
affirmed of national indebtedness that, in so far as its cre-
ation is at the expense of superfluous capital — i. e., in so
far as it only appropriates funds whose existence would
discourage future production — it acts as a stimulus to in-
dustry, temporary to be sure, but effective and beneficial
as long as it lasts. This remark, however, only applies to
such part of the debt as is due to the individuals compos-
ing the indebted nation. What a government borrows of
foreigners fails to deplete its own dead stock, and conse-
quently to augment its own rate of profit and its industrial
252 CAPITAL AND POPULATION.
activity. Such loans are not even of temporary benefit to
industry, unless they are employed productively for wise
projects, which would not else have been undertaken at
all. They are only justifiable to nations whose existence
is threatened, or who are in need of great internal im-
provements that they lack means to provide for them-
selves. But so far as a nation's loans are drawn from the
funds of its own citizens, their first effect is to increase
both the rate and the sum total of profits, and to increase,
though in a somewhat less degree, the total of the wages-
fund and the rate of real wages.
After the loans are completed and expended, and
after capital has again adjusted itself to population, this
beneficial effect ceases, and national indebtedness becomes
more or less detrimental to production. In so far as the
consequent taxation adds to the cost of production, it less-
ens the benefit of foreign trade. Though this is a serious
loss, it is so well recognized a result of national indebted-
ness that it does not demand from us a notice adequate to
its importanace, and its consideration need not further
detain us.
Whatever of the proceeds of taxation is returned in the
form of interest to its own citizens, does not, of course,
affect the net income of the nation, and, except as it
stimulates accumulation, has no influence upon produc-
tion. "Whatever is so paid to foreigners is, on the other
hand, altogether at the expense of the net national in-
come, and can not but result in a total loss, except as it
is counterbalanced by benefits still enjoyed through the
employment of the original loan in projects for which
the national capital was insufficient. Whatever this loss
of net income, the gross annual product of the indebted
nation need not be decreased, provided the consequent
SOME OTHER EFFECTS OF THE LAW. 253
loss of revenue is not so great as to forbid the accumu-
lations necessary for its wages - fund and fixed capital.
When payments of interest or other remittances to for-
eigners (such, for Instance, as tribute or for funds ex-
pended by absentees) are so great, as is the case with Ire-
land, India, and a few other unfortunate lands, that they
cause population to press upon capital, not only is the net
revenue of such a people reduced, but the gross product
as well.
That foreign indebtedness need not decrease the gross
product of a nation is, however, only true of its amount,
and not of its value. As has been ably shown by Mill,
the equation of international demand is always disas-
trously affected, to a creditor nation, by its remittances
on account of absentees, tribute, loans, interest, or profits.
The value of its gross product can not but diminish, al-
though its amount may not do so as long as its population
remains the same, and its capital is not too much depleted
or supplanted. But the effect of this national loss in
depressing real wages, by lessening the stimulus to
population, will finally lead to a decrease of the gross
produc t also, at least relatively to what it might have
been, if such foreign indebtedness had never been in-
curred.
Repayment of the principal of its national debt to its
own citizens is wholly an addition to the capital of the
country, unless the necessary funds are derived from a
tax upon capital. In so far as it adds to capital, it, of
course, disturbs its ratio to population, and tends to bring
about, sooner than it would otherwise occur, the period
of industrial stagnation that inevitably results from over-
accumulation. I^ational net income and gross product
are both diminished by the process. When such repay-
254 CAPITAL AND POPULATION.
ment is made to foreigners, production is not disturbed
(and, in so far as tlie taxation, from which the funds so
expended are derived, depletes the national capital, pro-
duction is even increased), but as the equation of inter-
national demand is injuriously affected, its value, though
not necessarily its amount, is lessened.
All of the above remarks apply as well to private as to
public foreign indebtedness, except that private borrowing
abroad, being always for productive purposes, affects the
normal ratio of national capital to population, by allowing
foreign capital to monopolize the avenues for investment,
by which alone home accumulations can be utilized or
retained. This not only hastens the period when capital
will be found to have exceeded its limits, and thus lessens
industrial activity and production, but it also allows for-
eigners to possess themselves of profits that would else-
wise have very soon accrued to the future savings of
home capitalists.
There is no economic fallacy more firmly fixed in the
popular mind than the belief that a nation derives advan-
tage from borrowing of its neighbors. We now see how
insidious and disastrous such a policy really is, and that
whatever interest and profits are paid on such loans are
purely and simply gifts, in all cases where a tendency
exists in the indebted nation for capital to increase more
rapidly than population. Indeed, such interest and prof-
its are far from expressing the real amount of such gifts
— a sum, almost as great, must be added as a consequent
of the resulting disturbance of the equation of interna-
tional demand.
Within the country itself, the effect of a national debt
on the distribution of wealth is also undesirable. It in-
creases the gross amount of profits at the expense of the
SOME OTHER EFFECTS OF THE LAW. 255
wages-fund and real wages. The capital of such country
will soon be just what it would have been if the debt had
not been created, and it will demand and receive the same
rate and amount of profit. As the gross product is not
increased, whatever income capitalists obtain from the
advances they have made to the government, is ulti-
mately derived, through prices, from the consumers, and,
in so far as laborers are consumers, from real wages. Al-
though, therefore, the immediate effect of the payment
of the national obligations is detrimental to the laboring
classes, on account of the decreased production and less-
ened employment it temporarily causes, the ultimate ef-
fect will be beneficial, in that it will give them a larger
normal share of the gross product.
Our principle also profoundly affects the controversy
between the bi-metallists and the advocates of a single
standard, and should, I think, settle the controversy in
favor of the former. The claim of the latter that the rela-
tive value of the two precious metals depends upon the cost
of production, and can not be arbitrarily fixed, as it must be,
if both metals are to be used, seems to me fallacious. So
much the greater part of their value is due to their use as
mediums of exchange, that all nations agreeing to use them
interchangeably in any fixed proportion, not too much at
variance with their value for other purposes, would reduce
the two metals, for the purpose of scientific discussion, to
one commodity. As the utility of the two would be not
only equal but identical, the effect of any relative increase
in the cost of the production of either would not change
their relative value, but only enhance the rentals of the
mines from which the other was exploited. Thus, if the
only use of wheat or of rye was to make bread, and the
bread from either grain was absolutely indistinguishable
256 CAPITAL AND POPULATION.
from that made from the other, the relative value of the
two grains could never differ. If an improvement in
agriculture should enable wheat to be raised at less than
its former cost, while the production of rje was unaf-
fected, wheat would not thereby sell for less than rye,
but more of it and less of rye would be grown, and lands
adapted to wheat would bring higher rentals. The real
utility of both gold and silver is artificial and identical,
and their value in relation to each other can consequently
be arbitrarily fixed, if only the agreement to do so be
complete. Their value as compared with articles of nat-
ural utility is not subject, of course, to arbitrary adjust-
ment, but their value relative to each other can be, at
least, within the limit that neither shall be cheaper than
its value for other utilities than that of serving as a me-
dium of exchange.
Assuming that the ratio between the two can be fixed,
the demonetization of silver amounts simply to a world-
wide contraction of the currency.
The influence of price on industrial activity is not
sufficiently recognized, nor can it be, while the amount
of activity is supposed to increase or decrease with the
amount of capital. The principle here advanced that,
under our present economic organization, profit being the
sole stimulus to production, industrial activity will vary
with the rate of profit, within the limit of the physical
sufficiency of capital to supply the fund for wages, leads
us to attach a new importance to the phenomena of
price.
A rise in prices, however equal and uniform it may
be, transfers value from the creditor to the debtor class.
This encourages production, not only because the latter
are pre-eminently the class upon whom the amount of
SOME OTHER EFFECTS OF THE LAW. 25T
production depends, but because, in such times, the risk
of giving credit being lessened, the credit system itself is
extended. But a rise in prices is never equal and uni-
form. Any difference in the prices of different material
commodities, however it may change the direction, has
little or no influence upon the gross amount of produc-
tion ; but other commodities advancing in price more
rapidly than labor, stimulates production, because thereby
profits are enhanced. Any rise in the price of labor
more rapid than that of material commodities, or decline
in the latter more rapid than the decline in wages, has,
of course, the contrary effect, and serves to limit and re-
press production.
There is one peculiarity of the exchangeable value of
labor, to which, although it is involved in w^hat I have
said, it would perhaps have been better to have pointed
more distinctly earlier in the argument. The exchange-
able value of any article, however much it may vary,
can never exceed its supposed utility ; but productive
labor has absolutely no utility of itself, it is never worth
more than it will produce ; consequently its value can
never rise above the value or supposed value of what
it can produce, less a satisfactory profit to its employer.
In proportion as its value is less than this, will capitalists
seek to employ it, and the sum of production be the
greater and the total wages-fund increased. When any
material commodity, on account of its scarcity, increases
in value, the total amount of it in existence may exchange
for a greater, the same, or a less amount of other things
than before. When the cost of labor is enhanced on ac-
count of its scarcity, as compared with the sum total of
existent material products, the total amount exchanged
(i. e., employed) will only obtain a smaller sum total than
258 CAPITAL AND POPULATION.
before, because what is not employed, as it can not be re-
served, is lost to its possessors for ever.
The price of labor is affected by another peculiarity.
During any period of rise or of fall in general prices, labor
is among the last of the commodities to be affected. Its
rise or fall follows that of the material commodities it
produces only after a considerable interval. It conse-
quently happens that any period of advancing prices is
also a period of great industrial activity, and a period of
declining prices one of industrial stagnation. An ephem-
eral rise is, to be sure, of only transient advantage, and,
as I have elsewhere shown, more than compensated for by
the results of the ensuing decline — i. e., the sum total of
the production of both periods is less than if prices had
remained uniform at their normal figure. But when the
advance in prices is maintained, the advantage gained by
it, and the accumulation it justifies, are retained. This
explains why the industrial development of the civilized
world, which we are yet enjoying, was coincident in its
commencement with the discovery of the mines of Mex-
ico and Peru. And that this development has been sus-
tained to the present time by the discovery and exploita-
tion of the mines of the United States, Australia, and
Siberia, history does not allow us to doubt, although
other powerful causes, such as the advance in science and
the arts, greater freedom of individual and social action,
and the greater abundance and availability of fertile land,
have contributed to the result.
The increase of material wealth and in the activity of
exchanges, as well as the growth of population, act as a
drag upon the gradual and permanent rise in general
prices to which they largely owe their being. Yast as
has been the increase of the world's circulating medium,
SOME OTHER EFFECTS OF THE LAW. 259
and greatly as its efficiency has been increased by the de-
velopment of the credit system, the activity of exchanges
has increased in nearly equal proportion.
When the system of co-operation is fully organized
and established it will not be so, but as long as produc-
tion is carried on, on the basis of the wages system, a
gradual and permanent decline in prices must entail a
gradual and permanent decline in production, or at least
greatly retard its increase. Such a period must be one
in which the average rate of profit is smaller, and the em-
ployment of labor less, than when the general tendency
of prices is to advance. Under co-operation, the induce-
ment to produce will not so much be profit, as the desire
to utilize labor ; but, while employer and employe are dis-
tinct persons, the amount of production must wholly de-
pend on the rate of profit, and anything that lowers that
rate, as a gradual and permanent decline in prices would
do, can not but depress industry.
The demonetization of silver, if it becomes general,
will undoubtedly depress prices to somewhere about the
point they reached in the middle ages, and will entail an
incalculable but enormous decline in the material pros-
perity of the world. The adoption of that policy by
England, Germany, and the United States was mainly
responsible for the severity and long continuance of our
last period of depression, and, if it is continued by these
nations and adopted by others, we may expect our peri-
ods of industrial activity to be shorter and less gainful,
and our periods of depression to be longer and more se-
vere, than they have heretofore been ; and to such degree
will this result as, in all probability, to place the world
in the retrogressive state in which the total production
will annually decline.
260 CAPITAL AND POPULATION.
Any increase of the medium of exchange, founded on
the solid basis of an increase of the precious metals, or on
that of a legitimate and safe extension of credit, yields
benefits analogous to those derived from an inflation of
the currency, without the drawback of the ensuing con-
traction, that must occur when it is founded on an un-
substantial basis, or confined to the limited area of a
single nation. Advancing civilization demands not only
an equivalent but a somewhat greater increase in the
medium of exchange, and can not proceed without it, as
long as labor continues to be a commodity.
The above observations on prices and the medium of
circulation serve to explain the anxiety with which com-
mercial men watch the rate of international exchange and
the importation or exportation of gold. It is not because
they are yet infected with the exploded fallacies of the
mercantile system, but because experience has taught
them that the increase of the circulating medium means
a period of higher prices, greater profits, and increased
industry, and that the exportation of gold is a warning to
prepare for lower prices, declining profits, and industrial
stagnation.
Further instances could be multiplied where theories
are modified and facts explained by the recognition of
the law I have attempted to enunciate and elucidate —
the ramifications of the subject are endless and lead in
every direction. As the purpose of this work is rather
to substantiate than to apply the main principle involved,
enough has been said on these points, except to call at-
tention.to the fact that the law, which I have endeavored
to explain, affects social questions as powerfully as it
does economic. These have, to some extent, been con-
sidered, but only when they were involved in the eco-
SOME OTHER EFFECTS OF THE LAW. 261
nomic questions under review. Considering them as
beyond the strict domains of our science, and as belong-
ing to a higher one, it would have been out of place to
attempt to consider them in their full bearings, and I
only mention them here, that it may not be supposed
I am oblivious of their relation to the subject.
CHAPTEK XYIir.
CONCLUSION.
Although it will involve some repetition, a gathering
together of the principal results obtained into a conden-
sation of my argument will not be out of place.
We have first found an important variation in the
definitions of capital, as given by Eicardo and Mill, and
have seen that that of the former is defective ; and that,
while Mill has rectified the definition of Ricardo, he has
adopted the latter's deductions, without perceiving that
they were only applicable to capital in the limited sense
in which Ricardo used the term. We have then made
the deduction that over-accumulation — meaning by that
term an increase of capital beyond the needs of popula-
tion — is not only possible, as Mill and Ricardo both ac-
knowledge, but of frequent and periodic occurrence in
all civilized nations, and that it is so was proved by the
irrefutable test of the rate of profit during times of de-
pression, and the periodic occurrence of such times —
the low rate that always obtains in such periods being a
certain indication that capital is then superabundant.
We then noticed that the distinction between dead
and active stock, although perceived and acknowledged
by both economists, was practically ignored in their argu-
ments.
We also noticed that the over-accumulation which is
OONCLUSIOK 263
here contended for does not at all conflict with the re-
sults obtained by Say from a consideration of the laws of
supply and demand, but, on the contrary, is in full ac-
cordance with them, labor being considered as a commod-
ity. We also detected Mill in an erroneous use of the
word "market," and found that, the word really refers,
not to the possibility of exchanging at any price, but only
to the possibility of goods exchanging for the value of
the labor that will reproduce them with some profit, and
that a market is good or bad in proportion as such profit
is great or small.
We also ascertained that the adjustment of the ratio
of capital to population, when producers are influenced
in their production by the hope of gain, could only prac-
tically be obtained by a sufficient cessation from further
production, and that the consequent lack of employment
overbalanced to the laborers the accompanying rise in
their rate of proportional wages.
In the further pursuit of the argument we were able
to rightly discriminate between proportional and real
wages, and to show that they varied inversely instead of
together, as has heretofore been assumed. This, again,
led us to valuable conclusions on the labor question, so-
cialism, and co-operation, and enabled us to make the im-
portant deduction that a high rate of proportional wages
is not, as Mill and Kicardo everywhere assume, a stimulus
to population, but the reverse — the real stimulus being
the rate of real wages, that varies inversely wdth it. And
this deduction threw some further light upon the labor
question, and showed that the efforts of the laborers,
through their present organizations, to raise money and
proportional but not real wages, are very prejudicial to
their own interests.
12
264 CAPITAL AND POPULATION
We were then enabled to arrive at a complete and
satisfactory explanation of commercial crises and the in-
dustrial stagnation which invariably follows them, a hith-
erto unsolved problem of the science. We were also
enabled, as never before, to understand the economic nat-
ure and action of credit, and to correct several miscon-
ceptions on the subject.
Having established the fact that capital in civilized
countries constantly tends to an over-increase, it of course
followed that a country would very soon obtain any ad-
ditional capital demanded by an increase in its popula-
tion or by a change in the nature of its industries, and
that such increase would be the fruit of labor that would
otherwise have been wasted in idleness. This enabled
us to undermine the fundamental premise of free trade,
in so far as the distribution of wealtk is concerned. We
saw that the gain or loss to an individual nation of im-
porting foreign goods was not to be computed from a
comparison of the price at which a commodity could be
imported with the price at which it could be made at
home, but from a comparison of its imported cost with
the cost alone of the labor which would be diverted to
its manufacture. We further showed that what caused
nations to manufacture instead of to cultivate the soil
was, to but a slight degree, any advantage possessed over
their neighbors in manufacturing itself, but was mainly
the lowness^ of their own margin of cultivation. A fur-
ther consideration of the inherent nature of agriculture
and manufacture showed the latter to possess great eco-
nomic advantages over the former as a national pursuit,
and to such degree that, as a matter of fact, some coun-
tries, with the least natural facilities for production, had
greatly the advantage over their more favored neighbors
CONCLUSION. 265
in the amount of their capitalized wealth, and were able
to equal them in the value jper cajpita of their annual
product, notwithstanding a great difference in the re-
spective efficiency of their labor ; and we saw that this
unnatural result was accomplished through the profits,
that nations with a high margin of cultivation could ap-
propriate to themselves, through a protective policy alone,
and that the gain of such policy, if wisely pursued,
would overbalance any loss in the efficiency of labor
that resulted from its being diverted from agriculture.
A consideration of the equation of international de-
mand, based entirely upon Mill's premises, and with
some trivial exceptions upon his deductions, also showed
us that the equation, in the nature of things, when com-
merce is unrestricted, must be against an agricultural
country ; and led us to the new and important principle
that the gain of the manufacturing country will not ex-
press itself in its rate of manufacturing profit, but in the
amount of its dead stock and the gross amount of its
profits thereon. This heretofore unobserved circum-
stance enabled us to appreciate as never before the prac-
tical working of the equation itself, and explained the
fact that manufacturing are the lending nations of the
world. We then considered the distribution of wealth
in a protected country, and found that, though not as
beneficial to its laboring classes as could be wished, it yet
worked somewhat to their advantage, especially when the
policy was first adopted. "We ascertained, in the course
of our argument, that a manufacturing country can not
protect itself against an agricultural, and only injures
itself by the attempt, and that the policy of " fair trade,"
coming into favor in England, is illusory in its promises.
"We also discovered that the nations now benefited by
266 CAPITAL AND POPULATION.
free trade will, in the near future, be forced into com-
petition with nations of a yet lower margin of cultivation,
and, when this happens, that their industry can only be
preserved, and that but partially, by they themselves
adopting the policy they now denounce.
A discussion of rent elucidated the fact that there is
an hitherto unnoticed difference in the effect upon prices
of that portion of it due to inherent fertility and that due
to propinquity to market, and that the latter does affect
the comparative value and price of manufactured goods,
and is at the expense of the consumer of such goods
wherever consumed, and that, when such consumer is a
foreigner, such portion of rental is a tribute laid by one
country upon another.
A consideration of commerce, hitherto left out of the
discussion, showed it to possess advantages as a national
pursuit superior even to manufactures, but that it could
only be protected in the form of subsidies granted to it,
and we obtained suggestions as to our own national policy
of the greatest value.
Finally, we found that the admitted loss to the world,
in the efficiency of its labor caused by protection, was
only the price that must be paid for a better final distri-
bution of its labor and capital ; and, although we were un-
able to determine whether the result was fully worth the
price, we did find several indications that it was suffi-
ciently so to remove the moral stigma of national selfish-
ness from those nations who adopt the policy.
Lastly, our principle threw greatly needed light on
the subjects of taxation and national indebtedness, and
afforded a basis for a positive decision in favor of bi-
metallism.
Affecting all these questions as it does, the importance
CONCLUSION. 267
of the principle that, in countries where law and order
prevail, the tendency of capital is to outstrip population,
can hardly be overestimated. It effects as great a revolu-
tion in economic ideas as any single principle ever enun-
ciated. Whether I have established it as a leading prin-
ciple of the science must be left to the reader to judge.
It certainly seems to me to be in accordance with every
fact of history and experience, to throw light on many
intricate subjects not hitherto understood, and to have a
practical bearing in the application of the science, that will
remove from it the stigma of consisting mainly of inap-
plicable theories — an objection hitherto too well founded
on fact. And, lastly, I can not but feel it to be in the
line of and in full accord with all well-established eco-
nomic laws, and, however inconsistent with their final
conclusions, purely the logical result of the thoughts and
teachings of the three great masters of political economy,
Smith, Eicardo, and Mill ; for which reasons I venture to
hope for this treatise a more kindly reception than the-
ories of over-accumulation have heretofore received.
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