LIBRARY 
 
 UNIVERSITY OF CALIFORNIA. 
 
 Class 
 
 
THE 
 
 PHYSIOLOGY OF INDUSTRY: 
 
 BEING AN EXPOSUEE OF 
 
 CERTAIN FALLACIES IN EXISTING THEORIES 
 OF ECONOMICS. 
 
 BY A. F. MUMMERY 
 ii 
 
 AND 
 
 J. A. HOB SON. 
 
 LONDON : 
 JOHN MURRAY, ALBEMARLE STREET. 
 
 1889. 
 
LONDON : 
 Printed by Henry Hansard and Son, 41, Parker Street, Drury Lane, W.C. 
 
PREFACE. 
 
 THE theory of Political Economy, as it left the 
 hands of Mill some forty years ago, has received many 
 vigorous assaults, and few economists can now be 
 found who would consent to accept it as their creed ; 
 but, strangely enough, while essential links in the 
 argument have been destroyed, the main practical 
 conclusion to which it leads is still regarded as a truth 
 which no one must question. This conclusion is 
 stated by Mill in these words/, ( saving enriches and f 
 spending impoverishes the community along with 
 the individual,' and it may be generally defined as 
 an assertion that the effective love of money is the 
 root of all economic good. Not merely does it 
 enrich the thrifty individual himself, but it raises 
 wages, gives work to the unemployed, and scatters 
 
 blessings on every side. From the daily papers to 
 
 a 2 
 
; 
 
 iv PREFACE. 
 
 the latest economic treatise, from he pulpit to the 
 House of Commons, this conclusion is reiterated and 
 re-stated till it appears positively impious to question 
 it. Yet the educated world, supported by the ma- 
 jority of economic thinkers, up to the publication of 
 Ricardo's work strenuously denied this doctrine, and 
 its ultimate acceptance was exclusively due to their 
 inability to meet the now exploded wages-fund 
 doctrine. That the conclusion should have sur- 
 vived the argument on which it logically stood, can 
 be explained on no other hypothesis than the com- 
 manding authority of the great men who asserted it. 
 Economic critics have ventured to attack the theory 
 in detail, but they have shrunk appalled from touch- 
 ing its main conclusions. Our purpose is to show 
 that these conclusions are not tenable, that an undue 
 exercise of the habit of saving is possible, and that 
 such undue exercise impoverishes the Community, 
 throws labourers out of work, drives down wages, 
 and spreads that gloom and prostration through the 
 commercial world which is known as Depression in 
 Trade ; that, .in short, the effective love of money is 
 the root of all economic evil. Having thus stated the 
 conclusions to which our argument leads, it appears 
 
PREFACE. 
 
 desirable to give a brief outline of its course, and to 
 note the more important points at which it conflicts 
 with currently accepted dogmas: 
 /The object of production is to provide ' utilities and 
 conveniences' for consumers, and the process is a 
 continuous one from the first handling of the raw 
 material to the moment when it is finally consumed 
 as a utility or a convenience. The only use of 
 Capital being to aid the production of these utilities 
 and conveniences, the total used will necessarily vary 
 with the total of utilities and conveniences daily or 
 weekly consumed. Now saving, while it increases 
 the existing aggregate of Capital, simultaneously 
 reduces the quantity of utilities and conveniences 
 consumed; any undue exercise of this habit must, 
 therefore, cause an accumulation of Capital in excess- , 
 of that which is required for use, and thisjsxcess will / / 
 exist in the form of general over-production. 
 
 Examining the terms Demand and .Supply, and 
 extending Professor Cairnes' argument on this subject, 
 we reach a law of price which enables us to relate our 
 theory to existing commercial phenomena, and to 
 identify Depression in Trade with a general fall in the^f 
 rate of incomes ; this latter with a decrease in the 
 
vi PREFACE. 
 
 1 
 
 I 
 
 quantity of the use of the Requisites of Production 
 demanded relatively to the quantity available for use ; 
 and this, again, with insufficiency in the quantity of 
 utilities and conveniences demanded, an insufficiency 
 which we show can only arise from the unduly saving 
 habits of the Community. We are thus brought to 
 the conclusion that the basis on which all economic 
 teaching since Adam Smith has stood, viz., that the 
 quantity annually produced is determined by the 
 aggregates of Natural Agents, Capital, and Labour 
 available, is erroneous, and that, on the contrary, the 
 quantity produced, while it can never exceed the 
 limits imposed by these aggregates, may be, and 
 actually is, reduced far below this maximum by the 
 check that undue saving and the consequent accumu- 
 lation of over-supply exerts on production ; i.e., that in 
 the normal state of modern industrial Communities, 
 consumption limits production and not production 
 consumption. We illustrate the effect of this check, 
 step by step, by the commercial phenomena of the 
 years immediately succeeding 1870. 
 
 We then trace the economic laws determining the 
 distribution of the annual income amongst Natural 
 Agent, Labour, and Capital owners, and show that the 
 
PREFACE. vii 
 
 present rate of wages would be considerably higher 
 
 were it not for the undue thrift of the richer members 
 
 I / 
 of the Community, and the consequent continuous 
 
 and persistent over-supply. 
 
 Our first point of divergence from the orthodox 
 school is thus to be found in our refutation of the 
 doctrine that saving does not reduce the aggregate 
 consumed, but merely varies the consumers. We . 
 show this doctrine to be founded on the wages-fund 
 theory, and we demonstrate that it is not tenable and 
 must be replaced by the simple formula 
 
 Production Saving = Consumption ; 
 i.e., the aggregate of Production being given every 
 increase in saving diminishes by its exact total the 
 aggregate consumed. 
 
 Showing that the use of Natural Agents, Labour, 
 and Capital, creates utilities and conveniences, we are 
 able to prove that the money paid for these utilities 
 and conveniences is paid for the use of the Natural 
 Agents, Labour, and Capital concerned, and that the 
 quantity of such use demanded is determined by the . 
 quantity of these utilities and conveniences consumed. 
 We are, in consequence, at issue with that school of 
 economists who assert that " Demand for Commodities " ' . 
 
viii PREFACE. 
 
 (utilities and conveniences) " is not Demand for 
 Labour." 
 
 Reaching our main conclusion, that the undue 
 saving of individuals impoverishes the Community, 
 simultaneously lowering Rent, Profit, or Interest and 
 Wages, we contradict the generally accepted dogmas 
 that the saving of the individual must always and 
 necessarily enrich the Community, that the indivi- 
 dual seeking his own advantage necessarily works for 
 that of the Community, and that wages can only rise 
 at the expense of profit, or profit at the expense of 
 wages, or both at the expense of rent. 
 
 In Chapter VII. we examine the contention of the 
 currency school, that Depression in Trade is due 
 either to insufficiency in the quantity of gold in 
 existence, or to an increase in the cost of producing 
 it, and we show that this theory is absolutely unten- 
 able. In the last chapter we glance briefly at some 
 of the practical conclusions to which our theory leads, 
 and note how effectual combination amongst labourers 
 would enable them to very materially improve their 
 position, a theoretic conclusion which has received 
 some slight practical illustration by the recent action 
 taken by labour combinations in various parts of this 
 
PREFACE. ix 
 
 country. We also note that the charge of com- 
 mercial imbecility, so freely launched by orthodox 
 economists against our American cousins and other 
 Protectionist Communities, can no longer be main- 
 tained by any of the Free trade arguments hitherto 
 adduced, since all these are based on the assumption 
 that over-supply is impossible. 
 
 In order to render our main argument easier to 
 follow we have carefully excised minor qualifications, 
 reservations, and explanations, and though this doubt- 
 less exposes us to misconstruction and adverse criti- 
 cism on minor details, we think this disadvantage 
 more than balanced by the greater clearness with 
 which it enables us to present our theory as a whole. 
 
 With the same object in view, we have placed, 
 after the table of contents, a series of definitions 
 which will enable our readers to easily and at once 
 ascertain the exact meaning which is to be attributed 
 to the terms employed. 
 
(Cmttenfs. 
 
 CHAPTER I. 
 
 SCOPE OF PRODUCTION. 
 
 PAGE 
 What is Production ? 1 
 
 Consumption the cause of all commercial activity (> 
 
 Distribution !> 
 
 Objects of Political Economy 10 
 
 Commodities !."> 
 
 CHAPTER II. 
 QUANTITATIVE RELATION OP WEALTH TO CONSUMPTION. 
 
 Definition of Wealth 20 
 
 Quantitative relation between aggregate of wealth and con- 
 sumption 23 ^-\ 
 
 Definition of Capital 33 
 
 The limits to Saving 37 
 
 Refutation of the theory of the possibility of infinite saving . 37 
 
 CHAPTER III. 
 
 THE PHYSIOLOGY OF PRODUCTION. THE LAW OF SUPPLY 
 AND DEMAND. 
 
 Supply and Demand 
 
 in relation to individuals and the community . . . 56 
 
 Purchasing power f>8 
 
 Demand for commodities cannot diminish capital ... 01 
 
 causes the production of new forms of wealth . . G3 
 
CONTENTS. 
 
 PAGE 
 
 Labourers not subsisted out of capital, but out of the value 
 
 they create 71 
 
 Capital exists continuously ........ 76 
 
 The individual can consume his capital, the community cannot 78 
 
 Demand for capital explained 79 
 
 The law of price . 80 
 
 Quantitative relation of consumption and capital, how main- 
 tained 82 
 
 Incomes received as the price of the use of a requisite of pro- 
 duction 88 
 
 Demand for commodities distributed as income to producers- . 90 
 
 Depression in Trade identified with insufficient consumption . 96 
 
 and with excessive thrift 98 
 
 CHAPTER IV. 
 OVER-PRODUCTION AND ECONOMIC CHECKS. 
 
 Alleged power of production to force consumption . . . 100 
 
 The object of saving is to increase capital 104 
 
 The individual by saving can avoid future labour . . . 106 
 
 The community cannot 108 
 
 No practical limit to the effective thrift of the individual . .111 
 Limit to the effective thrift of the community . . . .112 
 A fall in general prices cannot increase consumption . .117 
 A fall in money incomes necessarily coincident with a fall in 
 
 prices 121 
 
 A fall in profit will not increase consumption . . . .130 
 will limit production . . . . . .131 
 
 CHAPTEE V. 
 EXPANSION AND CONTRACTION OF TRADE. 
 
 The economic effects of the Franco-German War . . . 133 
 
 on saving . . . . . . . . . 134 
 
 on the distribution of the ultimate product between 
 
 makers and traders 136 
 
CONTENTS. * xiii 
 
 PAGE 
 
 Commercial crisis . - . . 142 
 
 General effects of under-consumption 143 
 
 Competition in retail trade . . 145 
 
 Effect upon the 'number of retailers .154 
 
 Importance of fluctuations in wholesale prices relatively to 
 
 retail 159 
 
 Effect on Wages of this fluctuation ... 161 
 
 CHAPTER VI. 
 THE LAW OP THE LIMITING REQUISITE. 
 
 The Interests of Labour, Capital and Natural Agents not 
 
 antagonistic 164 
 
 The law of distribution 166 
 
 Advantage possessed by the Limiting Requisite . . . .171 
 Natural Agents, Capital, Labour, considered respectively as the 
 
 Limiting Requisite 173 
 
 In the absence of under-consumption, Labour would be the 
 
 Limiting Requisite 178 
 
 Labourers the chief sufferers from under-consumption . .182 
 
 CHAPTER VII. 
 
 SCAECITY OF GOLD AS AN ECONOMIC FACTOR. 
 
 The arguments of the currency school 186 
 
 The origin of Purchasing Power .187 
 
 The use of money 188 
 
 Scarcity of gold currency measured by Bank rate of discount . 190 
 Scarcity of gold currency not the cause of low prices . .192 
 Cost of production of gold does not determine price levels . 194 
 
 but is determined by price levels 195 
 
 Prices determined exclusively by the quantity of Purchasing 
 
 Power exerted 197 
 
 Entry of gold into circulation . . . . ' . .198 
 Extent of its effect on prices 201 
 
CONTENTS. 
 
 CHAPTER V11I. 
 
 PRACTICAL CONSIDERATIONS. 
 
 PAGE 
 
 Limitations imposed by the scope of our inquiry . . . 202 
 
 Incidence of taxation 203 
 
 The basis of the Free Trade argument . . . . . 205 
 
 how modified by the theory of under-consumption . . 207 
 
 illustrated by figures 208 
 
 The interests of the labourers : 209 
 
 Methods by which labourers may mitigate the worst effects of 
 
 under-con sun ption 211 
 
PRODUCTION is the work of endowing material or immaterial forms 
 with Exchange Value. 
 
 PRODUCERS are those engaged in the work of Production, and are 
 divisible into two classes : 
 
 I. MAKERS (Agriculturists, Manufacturers, and all who create 
 Value by changing Shape). 
 
 II. TRADERS (Merchants, Wholesale or Retail Vendors, and 
 all who create Value by changing Place). 
 
 REQUISITES OP PRODUCTION are those instruments which, by their 
 Use, contribute to the work of Production. They are three in 
 number : Natural Agents, Capital, Labour. [Capital includes- 
 all Plant, Raw Material, and articles embodying value which 
 have not yet reached their final destination.] 
 
 CONSUMPTION is the sudden or gradual destruction of a valuable 
 article obtained from a retail trader or other final producer. 
 
 CONSUMERS are those who obtain possession of valuable articles 
 in order to destroy them for the direct satisfaction of their own. 
 desires ; i.e., not as a means to producing other things. 
 
xvi DEFINITIONS. 
 
 COMMODITIES are valuable articles in the possession of (or in the 
 act of passing into the possession of) Consumers. 
 
 GOODS are valuable articles in the various stages of production 
 between Kaw Material and Commodity. Goods in the hands of 
 Retailers are Shop-goods. 
 
 RENT is the payment for the Use of Natural Agents paid to their 
 owner. 
 
 PEOFIT is the payment for the Use of Capital paid to its owner. 
 The Profit or payment for the Use of Money is called Interest. 
 
 WAGES are the payment for the Use of the bodily or mental Abilities 
 of the Labourer ; this use is termed Labour. 
 
 QUANTITY DEMANDED is 
 
 (1.) In relation to an Individual or a Class the quantity 
 bought by such individual or class. 
 
 (2.) In relation to the Community the quantity bought by 
 Consumers. 
 
 QUANTITY SUPPLIED is identical with Quantity Demanded, regarded 
 from the point of view of the Selling Individual, Class, or Com- 
 munity. 
 
 DEMAND is the quantity of money paid for the Quantity De- 
 manded. 
 
 SUPPLY is 
 
 (1.) In relation to an Individual or a Class the quantity 
 of articles offered for Sale by such individual or class. 
 
 (2.) In relation to the Community the aggregate of articles 
 available for Sale to Consumers. 
 
DEFINITIONS. xvii 
 
 MONEY INCOME (Income) 
 
 (1.) Of the Individual is the excess of money values pos- 
 sessed by him at the end of the year, plus the money spent 
 during the year, over the sum of money values possessed by him 
 at the beginning of the year. 
 
 (2.) Of the Community the aggregate of the Money Incomes 
 of all individuals in the Community. 
 
 REAL INCOME 
 
 (1.) Of the Individual is that portion of the stock of wealth 
 of the Community which his money income would purchase, 
 
 (2.) Of the Community is the total wealth consumed during 
 the year, plus any increase in Capital, 
 
THE SCOPE OF PRODUCTION. 
 
 
 or THE 
 
 UNIVERSITY 
 
 CHAPTER I. 
 
 THE SCOPE OF PRODUCTION. 
 
 SINCE the science of economics is concerned with 
 matters which engross the thoughts and conversation 
 of the large mass of unscientific men, special heed is 
 required in the adoption and use of those common 
 terms current in the world of commerce. In no other 
 realm of knowledge have 'masked words' wrought 
 such confusion : the name ' idols of the market ' has 
 a peculiar fitness when applied to those loose and 
 deceptive commercial phrases the unmasking of which 
 has formed the chief occupation of economic thinkers. 
 Even now it is impossible to approach the study 
 without perceiving the entrance beset with terms and 
 phrases respecting the use of which nearly all pre- 
 vious writers are at variance, and which each separate 
 writer finds it hard to employ for any long argument 
 without unconsciously shifting the sense. 
 
 The production, the distribution, and the exchange 
 of wealth are the three objects of investigation which 
 most modern writers l set before them ; others, and 
 generally the older economists, add the term con- 
 sumption. 
 
 1 E.g., Mill, ' Principles of Pol. Econ.,' p. 14 ; Fawcett, Book I., Ch. I. ; 
 Sidgwick, Ch. II. 
 
 A 
 
THE SCOPE OF PRODUCTION. 
 
 Now the setting forth on an equal footing of these 
 three or four objects of consideration, and the attempt 
 at a separate treatment of them, have been a fruitful 
 source of confusion not only to the readers but to the 
 writers of economic treatises. 
 
 The loose use of the word distribution has caused 
 the most trouble. Following the term production, 
 and used in close association with the term exchange, 
 it would naturally suggest the work or process 
 whereby the products which had received their final 
 shape were conveyed from the place where they 
 were manufactured in order to be retailed to the final 
 consumers. This meaning, would easily accommo- 
 date itself to the general use of the term production, 
 which is confined to the transmutation and trans- 
 formation of material objects, and does not include 
 their conveyance to the place where they are wanted. 
 Now, though writers like Mill and Fawcett do not 
 go so far as to directly authorise this extremely 
 narrow use of the term production, they do distinctly 
 represent distribution as a process which follows the 
 process of production, and furnishes employment for 
 certain classes of labourers. Thus Mill, in the very 
 chapter l where he is treating of labour as an agent 
 in production, expressly distinguishes the producing 
 class from the distributing class, including under the 
 latter all " dealers and traders." The ' class of labourers 
 employed in rendering the things produced accessible ' 
 are styled by him 'distributors.' It is clear, then, 
 that with him the work of production ends when the 
 products are stored in the factory in a completed 
 shape, and that the work of distribution then begins. 
 
 1 ' Principles of Pol. Econ.,' Book I., Ch. II., s. 6. 
 
THE SCOPE OF PRODUCTION. 
 
 Mill further 1 regards exchange as " the instrumentality 
 by which distribution is effected/' thus emphasising 
 his view of distribution as a process following pro- 
 duction. Although Fawcett does not follow Mill in 
 narrowing the producing class so as to exclude 
 traders and retailers when dealing specifically with 
 this question, he allows himself later on to distin- 
 guish the work of exchange and of distribution from 
 that of production. " It is quite true/' he says/ 2 
 " that commodities are only produced to be ex- 
 changed for other commodities, and the distribu- 
 tion of wealth, of course, implies the exchange of 
 wealth." It is clear that he here falls into the same 
 narrow use of production which Mill authorises. 
 Many other passages might be quoted to show how 
 economists have allowed themselves to be misled by 
 the common use of the term distribution as a process 
 contrasted with the process of production. 3 It is 
 only fair to say, however, that neither Mill nor 
 Fawcett, when they have come to the consideration 
 
 1 'Pol. Econ.,' Book II., Ch. XVI., s. 6 ; and Book III., Ch. I., s. 1. 
 
 2 Book III., Ch. I. 
 
 3 Marshall, Book II., Ch. VI, s. 1, and Sidgwick, p. 171, escape 
 this confusion. Prof. Sidgwick, however, does not realise the extent 
 of the trouble caused by the confusion, and he himself uses ambigu- 
 ous language in speaking of 'division of aggregate produce' as the 
 object of distribution. Distribution, as a branch of economics, has 
 nothing to do with the commercial process of division, but only, as 
 Prof. Sidgwick himself points out (p. 175), with the ' laws,' according 
 to which ' the increment of new commodities is shared among the 
 different classes of persons' who have 'co-operated in providing it.' 
 He, however, appears to include under the -forms of wealth with the 
 division of which ' distribution ' is concerned, ' additions to indus- 
 trial capital.' The laws of distribution are rightly concerned only 
 with the apportionment of what Prof. Sidgwick terms ' consumers' 
 wealth,' which will be found to be the sole source of the real income 
 of the community. 
 
THE SCOPE OF PRODUCTION. 
 
 of distribution, have dealt with it as a process sub- 
 sequent to production. The questions they there 
 propound and discuss have no relation to the 
 process of distributing or the means of distribu- 
 tion, but relate exclusively to the principles which 
 regulate the proportion of the created utilities which 
 falls to the respective parties who have assisted to 
 produce them. Since it is clear that to this final 
 apportionment distribution alone rightly refers, it is a 
 great misfortune that a term should have been selected 
 to express it which has been able to deceive the very 
 elect. 
 
 We have already noted the tendency in Fawcett l 
 to make of exchange another process separate from 
 production, although in his discussion of the agents 
 of production he would include all those engaged 
 in the work of exchange. The same tendency, induced 
 by an unconscious adherence to the vulgar, narrow 
 use of production, may be observed in the writings of 
 other economists. For example, in Mr. Amasa 
 Walker's able manual, ' Science of Wealth ' (p. 36), 
 after dealing with " production of wealth," the author 
 proceeds : "Since men have different capacities and 
 tastes, their products will be different ; and yet since 
 all men desire nearly the same objects, an interchange 
 of their respective commodities will become a neces- 
 sity. Hence arises that department of industry 
 called exchange!' Thus we see production and ex- 
 change as two separate ' departments of industry.' 
 That the ordinary man of business should distinguish 
 production, distribution, and exchange as three pro- 
 cesses involving a separate machinery for each, is no 
 
 1 E.g., Book I.. Ch. III. 
 
THE tiCOI'K OF PRODUCTION. 
 
 matter of surprise, though even he must find some 
 difficulty in distinguishing the machinery of distribu- 
 tion from the machinery of exchange. But that 
 professed economists should have sanctioned this 
 commercial division is extremely regretable, involv- 
 ing as it does a loose and inadequate idea of the unity 
 of production. 
 
 What is production ? involves the further ques- 
 tion, What is produced ? The answer is, value 
 exchange value. The whole work 'or process of pro- 
 ducing value is termed production. Dealing for the 
 present exclusively with the outer world of matter 
 we next ask, How is value given to matter ? By 
 change of form or place. By change of form man 
 gives value to agricultural or manufactured goods ; he 
 adds further value by moving them to the place 
 where they are most wanted. The value thus created 
 by the work of production must be regarded as an 
 attribute bestowed upon and resident in the matter. 
 Thus matter continually gathers value as it passes 
 from the condition of raw material towards the con- 
 dition of a utility, each step in the process adding to 
 this value. The material does not cease accumulating 
 value when it is turned out of the factory in a so- 
 called finished state. The merchants, wholesale 
 dealers, and shopkeepers through whose hands it 
 passes afterwards on its way to the consumer, are dis- 
 tinct contributors to its final value equally with those 
 whose w r ork gave it a finished shape. In the one 
 case, it acquires value by changing shape ; in the 
 other, by changing place. The latter value, just as 
 the former, must be reckoned as value inherent in 
 the article, even as it is found fully represented in 
 
THE SCOPE OF PRODUCTION. 
 
 the money price. Now all this, of course, no recent 
 economist would straightly deny, but most of them 
 by narrowing their use of the terms production and 
 producer so as to exclude traders and shopkeepers, 
 have implicitly denied it, and have lent themselves 
 on this account to a fallacy subtler, and therefore 
 perhaps even more disastrous than the mercantile 
 theory which gave the earlier economists such pains. 
 
 Although it is obvious that the end of production is 
 to supply " necessaries and conveniences of life " l to 
 consumers, this end, consumption, has been lost sight 
 of by almost all economic writers, who content them- 
 selves with a merely formal recognition of the place 
 which consumption occupies in the economic system. 
 Mill and Fawcett consider that political economy is 
 concerned with the production, distribution, and ex- 
 change of wealth, apparently considering that labour 
 has fully attained its end in producing articles which 
 are distributed and exchanged. 2 
 
 Other writers give a formal prominence to the 
 element of consumption, which leads one to expect 
 a systematic treatment of the subject. Professor 
 Jevons went so far as to say that "the whole theory 
 of economics must begin with a correct theory of 
 consumption." 3 The words of Laveleye are even 
 more significant : " The aim of production is the con- 
 sumption of its products in the satisfaction of rational 
 wants. Consumption is thus essential to production 
 
 1 ' Wealth of Nations,' Introduction, p. 1. 
 
 2 The only use they have for the term consumption is to found a 
 theory of capital upon a generic distinction in the method of con- 
 sumption. This theory we discuss at length later on. 
 
 8 Jevons, ' Theory of Pol. Econ.,' Ch. II., p. 43. 
 
THE SCOPE OF PRODUCTION. 
 
 and the final cause of all economic activity." l Pro- 
 fessor Sidgwick announces in an early place in his 
 book 2 that his inquiry will deal with " the general 
 facts of the consumption of wealth so far as these are 
 associated witrr-the former/' i.e., with " production, 
 distribution, and exchange." But the questions of 
 consumption with which these writers are concerned 
 deal with the wisdom or the folly, the pleasure and 
 the pain, the net advantages and disadvantages of 
 different kinds of consumption : they blend ethical 
 and psychological considerations with economics, dis- 
 cussing the quality of consumption to the entire 
 neglect of quantitative considerations. 3 In their insis- 
 tence on the right use of wealth these authors give 
 much sound ethical advice, though none of them 
 points his moral so skilfully as Ruskin, who defines 
 wealth as " a supply of really useful things for those 
 who can use them ; " if the things are not really use- 
 ful or fall into wrong hands they cease to be wealth 
 and become " illth." 4 
 
 This utter neglect of the question of a quantitative 
 relation between production and consumption, to- 
 gether with an inadequate grasp of the full meaning 
 of production, has led economists to give their 
 authority to the common impression that the real end 
 of commerce is to produce the largest amount of 
 goods in a finished shape, and that therein consists 
 the real guarantee of commercial prosperity. The 
 
 1 Laveleye. ' Pol. Econ.,' p. 246. 
 
 2 Principles of Pol. Ecou.,' p. 30. 
 
 3 Laveleye attempts to deal very briefly with the quantitative 
 relation between production and consumption. His argument is 
 stated below. 
 
 4 ' Unto this Last,' p. 126. 
 
ria: xcon: OF PRODUCTION. 
 
 largest rate of production by means of a well-adjusted 
 co-operation of capital and labour, is the goal to 
 which they can point, and production means the pro- 
 cess which is the necessary antecedent of distribution 
 and exchange. They thus emphasise the value which 
 is bestowed on raw material by the work which 
 changes its shape, but neglect the value bestowed on 
 it by the work which changes its place. 
 
 The uneducated mind may be excused for realising 
 better the value which is accompanied by change in 
 physical appearance than that which is accompanied 
 by no such alteration, but the economist trained to 
 the recognition of seen and unseen results can claim no 
 such allowance. Yet the whole tendency of their 
 teaching is to represent the production of a piece of 
 finished goods as the end or completion of an act. 
 When they have thus produced their wealth they 
 pause, and afterwards proceed to the separate inquiry 
 of how it shall be exchanged and distributed. Just 
 as the mercantile theory made the acquisition of 
 ' treasure ' the test and measure of national commerce, 
 so our modern economists have practically raised 
 finished goods into the same position. Their fallacy 
 is at bottom the same. We hear quite enough in 
 elementary text-books of the bag of gold which 
 Robinson Crusoe found. Yet in pressing the moral 
 that the bag of gold was no wealth to the worthy 
 mariner because he had no use for it, they neglect to 
 drive home the deeper lesson that it is the use of all 
 forms of wealth which enables them to reach their 
 end. A finished piece of goods before it is l ex- 
 changed and distributed ' is no more a ' utility ' or a 
 ' convenience ' than was Crusoe's gold. But why 
 
THE SCOPE OF PRODUCTION. 
 
 dwell on this point, which everyone is ready to recog- 
 nise ?, Because economists by narrowing and obscur- 
 ing the. meaning of production have lost the idea of 
 the essential unity of the process. What we, on the 
 other hand, wish to enforce is this, that the process 
 by which a piece of raw material becomes a useful 
 commodity is one process ; that the raw material 
 gathers value continuously by work done upon it, 
 not up to the time when it is said to be ' produced,' 
 but up to the time when it is handed over to the con- 
 sumer. The term production should and must rightly 
 apply to the whole process, the wholesale merchant 
 and the shopkeeper are just as rightly termed pro- 
 ducers as the farmer or the manufacturer. This failure 
 to clearly recognise that a commodity is being pro- 
 duced until it is consumed, this tendency to split up 
 the history of its growth into several processes, are 
 the reasons why economists have so lamentably failed 
 to grasp and represent the entirety and the unity of 
 the mechanism of commerce. 
 
 So far as the history of commodities is concerned 
 there are but two phases. Commodities are produced 
 and are consumed. There is no separate act of distri- 
 bution which figures in their lives. Even the act of 
 handing them over the counter to a purchaser is, 
 strictly speaking, nothing but the final act in their 
 production, is represented in their final value and paid 
 for in their price. The laws of distribution, to use 
 the unfortunate economic term, relate exclusively to 
 the separate questions, Who shall consume ? and 
 In what proportion? and are concerned not directly 
 with the apportionment of commodities but of pur- 
 chasing power. 
 
10 THE SCOPE OF PRODUCTION. 
 
 The laws of distribution thus regard the principles 
 which regulate the proportion of command over final 
 products which falls to the various agents in produc- 
 tion, landlord, capitalist, labourer. If the proportion 
 which holds to-day were changed to-morrow, so that 
 labour received twice what it does at present and 
 capital only half, the so-called ' work of distribution ' 
 would not necessarily be affected ; the change might 
 only mean that the same set of purchases will be 
 made by a different set of persons. If we were to 
 retain the term distribution for the work done by 
 merchants and retailers, we should be obliged to dis- 
 tinguish the laws of production and of distribution as 
 follows : 
 
 The laws of production relate to the method of the 
 work of production ; the laws of distribution relate 
 not to the method of the work of distribution, but to 
 the final distribution of the produce. But this course 
 would cause the direst confusion in dealing with facts 
 of commerce, so that it will be found better, if pos- 
 sible, to dispense entirely with the term distribution 
 in the analysis of commercial phenomena. 
 
 Regarding political economy, then, as the science 
 which deals with the method of furnishing 'neces- 
 saries and conveniences ' to the community, we find 
 that it is concerned with three chief facts ' : 
 
 1 These three economic facts will be found to be generally related 
 in the following way : When any value is created a general power 
 to purchase to an equivalent extent is portioned out amongst those 
 who have helped to create this value (with the equity of this 
 apportionment we are not here concerned). This general power of 
 purchase may be or may not be at once exercised. The results of its 
 exercise or non-exercise are facts which fall under the head of con- 
 sumution. 
 
THE SCOPE OF PRODUCTION. 11 
 
 Production of necessaries and conveniences (in- 
 cluding all the work of transportation and 
 arrangement for the convenience of expected 
 purchasers, commonly termed work of exchange 
 and distribution). 
 
 Apportionment of power to purchase these neces- 
 saries and conveniences. 
 Consumption, or the use made of the power to 
 
 purchase. 
 
 The first step in political economy is to establish a 
 clear recognition of the unity of commerce in the 
 work of production, the lack of which has caused such 
 grave trouble in economic writing. To do this we 
 will briefly trace the history of the production of a 
 1 utility ' from its first beginning to its final state. In 
 this history we need take no account of the second of 
 the three elements, apportionment of power to purchase, 
 since we have already seen that it has no place in the 
 history of a commodity. Consumption, as the final 
 goal towards which production moves, requires a 
 recognition in the history of a utility, but only as 
 serving to furnish a mark for measuring the progress 
 of the work of production. A favourite example with 
 writers on economics is a pair of shoes, presumably 
 because they are formed from a single raw material, 
 instead of requiring a combination of different materials 
 partly wrought. Now the raw material of a pair of 
 shoes is the hide of live cattle, and the first producer 
 of the shoes must be considered to be the butcher 
 who purchases and kills the cattle ; by these pre- 
 liminary acts he has imparted a value to the hide 
 which it did not possess when it was a part of the 
 live animal. Then comes the tanner, who purchases 
 
12 THE SCOPE OF PRODUCTION. 
 
 the hide from the butcher and treats it, adding a further 
 element of value. Then the shoe manufacturer, who 
 puts it through various processes, each one of which 
 adds distinctly to its value, and turns it out a finished 
 pair of shoes so far as shape is concerned. But this 
 pair of shoes is not yet either a utility or a convenience, 
 lying, as it does, amid a pile of other shoes in a factory. 
 A wholesale merchant buys it with a quantity of others 
 and sells it again to a small retailer ; by doing this he 
 adds to its value, bringing it nearer to the reach of a 
 would-be purchaser. The small retail shopkeeper 
 keeps it, displays it, and finally wraps it up, and hands 
 it over the counter to a purchaser ; thus imparting to 
 the pair of shoes their final element of value, he is 
 rightly to be esteemed the last producer of the pair of 
 shoes. The shopkeeper is the man who by his labour 
 exercised on the shoes assists them to take the final 
 step which makes them a ' utility or convenience.' 
 Continuously through the whole progress we have 
 described, the raw material has been gathering value 
 by change of form or change of place ; the attainment 
 of its full value is simultaneous with the grasp of the 
 purchaser. The work of production has now reached 
 its end, the work of consumption begins. Now it is 
 absolutely essential that we should have some term 4 to 
 distinguish the article in the hands of a consumer, 
 having already attained its full value, from the article 
 in the process of acquiring this value and approaching 
 this state. It is required to distinguish the pair of 
 shoes in the hands of a purchaser, in the first place 
 from a pair of shoes in the factory, in the second place 
 from the shoemaking machinery which is not destined 
 for consumption as a personal f utility or convenience.' 
 
THE SCOPE OF PRODUCTION. 13 
 
 Now there is no term set apart either by economics or 
 by popular usage for this purpose. As it is deemed 
 objectionable to invent terms, we are driven to the 
 alternative of selecting some existing term, and 
 restricting its use to suit our purpose. Etymological 
 accuracy suggests the word commodity as being fit to 
 represent an article which is in the hands of a con- 
 sumer as a personal utility or convenience. We 
 propose, therefore, to use the term commodity ex- 
 clusively in this sense. 1 Ra\v material which has 
 reached its final shape (e.g., a pair of shoes after pass- 
 ing through the shoemaking processes) we shall term 
 goods ; goods in the hands of retailers we shall term 
 shop-goods. This distinction, artificial as it sounds, is 
 essential to the exposition of our theory of commerce. 
 The history of a commodity expressed in these terms, 
 then, will consist of a series of continuous steps, leading 
 from raw material to goods, from goods to shop- 
 goods, from shop-goods to commodities. The number 
 of steps which lie between raw material and goods of 
 course differs widely in different cases, as also the 
 number of steps between goods and shop-goods. Again, 
 in taking the history of a pair of shoes, we have as- 
 sumed that each productive step in the progress from 
 raw material (hide) to goods (shoes) has been 
 registered in a change of shape of the material. This, 
 
 1 Prof. Sidgwick uses the terms ' consumers' wealth ' and producers' 
 wealth ' to make this same distinction between the wealth which is 
 * directly available for satisfying human wants and desires,' and the 
 wealth which is ' useful indirectly as a means of obtaining the other.' 
 (Principles of ' Pol. Econ.,' p. 86.) He does not, however, sharply 
 mark the limits of the two classes by a definition of the term ' directly 
 available ' in such a way as to exclude everything not actually in the 
 hands of consumers. 
 
14 THE SCOPE OF PRODUCTION. 
 
 however, is not always so. The hides may be bought 
 by a hide merchant who does not treat the hides him- 
 self, but sells them to the tanner. So, too, the finished 
 leather may pass through a merchant's hands, receiving 
 no change of shape before it enters the shoe-factory. 
 Thus, productive operations which give change of 
 place to material may be sandwiched in between the 
 operations which change its shape from raw material 
 to finished goods. To make the historic process clear 
 we may mark the various steps or stages in the 
 development of a commodity as follows, using the 
 abbreviation R. M. for raw material, R. M. 1 for the 
 first stage in production, and so on. 
 
 R. M. . . . (Hide on cattle). 
 
 R.M. 1 . . (Rawhides). 
 
 R.M. 2 . . (Prepared hides). 
 
 R.M. 3 . . (Leather). 
 
 Goods . . (Shoes). 
 
 G. ' . . . . (Shoes in exporter's hands). 
 
 G. 2 . . . . (Shoes in merchant's hands). 
 
 Shop G. . (Shoes in shop). 
 
 Com. . . . (Shoes in use). 
 
 There may have been one or more intermediate 
 step between R. M. l and R. M. 2 , or between R. M. 2 
 and R. M. 3 , or, indeed, at any point in the history of 
 production of the commodity. In the particular com- 
 modity we selected, a pair of shoes, the work of 
 change of shape for the most part precedes the work 
 of change of place ; but in the history of other com- 
 modities it is different. If we took the history of a 
 loaf of bread, the steps of production which consist 
 in change of place will be found almost to alternate 
 with those steps which consist in change of shape. 
 
THE SCOPE OF PRODUCTION. 15 
 
 The merchant's work, or, more generally speaking, 
 the work of transportation, here may come in after 
 the grain is produced, after it has been ground into 
 flour, after the flour has been made into bread. Thus 
 the history of a loaf of bread will present often a 
 larger number of distinct steps than those which we 
 have traced in the case of a pair of shoes. In other 
 cases the steps are much fewer, and are not infre- 
 quently performed by the work of a single man, as 
 where our supply of milk for household use is fur- 
 nished directly by the farmer. 
 
 Although an explicit declaration of our intention to 
 confine the term commodities to the sum of those 
 1 utilities and conveniences' to provide which is ac- 
 knowledged to be the sole end of commerce, might 
 seem a sufficient definition, it will, perhaps, be wiser 
 to guard against confusion by a further statement of 
 what commodity includes. 
 
 While in one way we are narrowing the common 
 use of the word, in another way we are assigning it 
 a wider meaning. We are narrowing it in so far as 
 we apply it only to that portion of material wealth 
 which is in the hands of persons who use or consume 
 it for their own benefit or pleasure, thus excluding 
 not only raw material in its several stages, but also 
 finished goods in warehouse or shop, and all plant 
 and machinery used to forward production. Thus, 
 neither a piece of leather, a pair of boots in a shop, 
 or a last is a commodity. On the other hand, we are 
 extending the meaning of the term to cover those 
 utilities and conveniences which consist in services 
 rendered by other persons, or by material objects 
 belonging to other persons, in return for pay. Thus 
 
THE SCOPE OF PRODUCTION. 
 
 the song of an opera singer and the advice of a phy- 
 sician will be included under the head of commodities, 
 as also the transmission of a letter for which we pay 
 a penny stamp. 
 
 It must, however, be frankly acknowledged that 
 this extension of the term commodity to include 
 those non-material utilities and conveniences com- 
 monly called 'services/ though absolutely essential 
 to a full understanding of the whole productive 
 system, involves many difficulties, and affords ample 
 scope for the exercise of casuistic criticism. For 
 instance, it may be urged that as we would include 
 conveyance in a hired carriage as a commodity, so we 
 must include conveyance in our own private carriage 
 under the same head ; it will then follow that a 
 private carriage is not itself a commodity, but only 
 a machine producing the commodity ' conveyance,' 
 unless we admit that one commodity can produce 
 another. So, too, as a hired house is to be regarded 
 as an instrument producing a commodity shelter, for 
 which we pay the purchase-money rent, our own 
 house should not be regarded as a commodity. But 
 if our house is not a commodity, but only an instru- 
 ment or machine continually producing a commodity 
 shelter, might we not in like manner regard our 
 clothes as an instrument producing the commodities 
 warmth, decency, ornament, &c. ? Thus we should 
 be driven to admit that even food was not a com- 
 modity, but only the producer of a commodity, 
 satisfaction of hunger, pleasure of taste, &c. The 
 difficulties all spring from the fact that it must be 
 admitted logically and in the last resort that all 
 ' utilities and conveniences ' are non-material ; that is 
 
THE SCOPE OF PRODUCTION. 17 
 
 to say, they consist of the ' services' rendered by 
 instruments. When thus tracked down, commodities 
 will be found to be forms or modes of satisfaction 
 produced or induced by instruments which may be 
 material or immaterial. Now, if we were to regard 
 these modes of satisfaction as the only commodities 
 with which we could deal, we should find that no 
 practical object could be gained by an attempt to 
 analyse or give quantitative value to production. For 
 we should have to acknowledge that these com- 
 modities must be estimated differently, according to 
 the particular person to whose service they were 
 applied, and depended as regards quantity in a large 
 measure upon the passing physical or mental condi- 
 tion of the recipient. In fact, the foundation of 
 political economy would be laid in those deep and 
 dark recesses of psychology which can never be 
 sufficiently explored to admit of exact quantitative 
 measurements. If, then, we are not prepared to 
 regard shelter, warmth, satisfaction of hunger, and 
 the other countless modes of satisfaction or pleasure 
 as the real commodities with which production is 
 concerned, are we prepared to apply the term exclu- 
 sively to the instruments which produce these modes 
 of feeling v In that case a carriage will be a com- 
 modity, whether it belongs to a carriage-owner who 
 lets it out on hire or to a private person who uses it 
 exclusively for his own pleasure ; a house will be a 
 commodity, whether hired or owned by the occupier ; 
 a steamship will be a commodity, whether it belong 
 to a great company and is used as part of their capital 
 for conveyance of goods or passengers, or whether it 
 be a private pleasure boat. Now, if we were to 
 
 A 2 
 
18 THE SCOPE OF PRODUCTION. 
 
 adopt this meaning, we should not attain the object 
 which we sought by a term which should express the 
 final result of the whole process of production as 
 distinguished, on the one hand, from the machinery 
 of production, and, on the other hand, from the inter- 
 mediate stages through which a piece of wealth 
 passed before it became a useful or pleasant object to 
 a consumer. Thus, neglecting the accurate logical 
 inquiry whether the object which renders a service 
 or the service rendered has a better claim to be called 
 a commodity, we propose to make the test one of 
 possession, so as to include under commodity any 
 material object or any service which has been bought 
 for the exclusive use of the purchaser or of his friends 
 to whom he may present it. 
 
 It is, of course, true that persons who buy houses 
 or carriages for their own use change their minds and 
 sell these commodities, or the unconsumed portion of 
 them, or use them as a means of getting an income. 
 So, too, certain commodities which are extremely 
 durable, such as houses or even furniture, may be 
 handed down from father to son, and the use of them 
 or the consumption of a part of them regarded as 
 part of the income of the temporary possessor. But 
 it is convenient and even necessary not to go behind 
 the immediate intentions of the purchaser of commo- 
 dities, and to consider that he who purchases any 
 commodity with the immediate desire to use it, 
 demands, and from the point of view of economics, 
 consumes the whole of the commodity. 1 
 
 1 The extent of the inaccuracy of economic treatment of com- 
 modities is well pointed out by Professor Sidgwick in his ' Principles 
 of Pol. Econ.,' Book II., Ch. I. 
 
THE SCOPE OF PRODUCTION. 19 
 
 Commodities will thus admit of the following 
 classification : 
 
 1. All material wealth in the possession of a 
 
 consumer of which the consumption is an 
 immediate utility or convenience, e.g., food. 
 
 2. All material wealth in possession of a consumer 
 
 of which the use (consumption being indirect 
 or protracted) produces a utility or conve- 
 nience, e.g., houses, carriages, clothes, furni- 
 ture, coal, &c. 
 
 3. All services rendered (i) By another person, 
 
 e.g., the waiting of a servant, the advice of a 
 physician ; (2) By material wealth belonging 
 to another, e.g., conveyance in a train or hired 
 carriage. 
 
20 PRODUCTION AND CONSUMPTION. 
 
 CHAPTER II. 
 
 THE BALANCE OF PRODUCTION AND 
 CONSUMPTION. 
 
 SINCE the end and object of commerce is to produce 
 those t necessaries and conveniences' to which the 
 term commodity is applied, it is useful to have some 
 further term which shall include all these repositories 
 of value, together with all those things which have 
 contributed to form their value. Since everything 
 which is a means 1 to the production of value itself 
 possesses value, the term which is required will apply 
 to all things possessing value. The word most suit- 
 able to express the sum of all values is wealth. This 
 use of the word is wider than either the ordinary 
 average meaning of the word, or the various meanings 
 which economists have thought fit to attach to it. It 
 includes not only all ' necessaries and conveniences/ 
 material or immaterial, but all valuable things which 
 
 1 The term ' means ' is not intended to be synonymous with con- 
 dition.' An atmosphere, and various other positive and negative 
 conditions, material or non-material, may be essential to the produc- 
 tion of commodities and they may possess no ' value.' 
 
PRODUCTION AND CONSUMPTION. 21 
 
 are on the way to become ' necessaries and con- 
 veniences/ and also all valuable things which assist 
 these latter in their progress towards the goal of com- 
 modity. 
 
 Economists have been led into difficulties in defining 
 wealth through their desire to keep as close as possible 
 to the ordinary average meaning of the word. Since 
 this ordinary meaning is approximately though not 
 precisely confined to material objects of value, it has 
 generally been thought best to exclude both services 
 and abilities from wealth. This exclusion has caused 
 much trouble in dealing with the use of capital and of 
 labour, and especially in dealing with income. The 
 exclusion is in fact quite illegitimate in any reasonable 
 theory of economics. There are no doubt practical 
 conveniences subserved by excluding them. They are 
 incapable of exact measurement, and thus cannot be 
 set off as value against a quantity of material goods. 
 It makes political economy simpler to exclude all con- 
 siderations save those of material values. But such 
 simplicity is only attained by the sacrifice of logical 
 method and practical usefulness alike. A political 
 economy which takes account of the direct increase of 
 material wealth brought about by the aggregation of 
 masses of workers in large cities, but which takes no 
 account of the effects of this change upon the physique 
 and morale of the community, can have no claim to 
 be a science capable of reaching truths which are of any 
 practical importance to any State or any individual. 
 
 The illogicality of excluding human abilities is 
 peculiarly patent. Though inseparable from the 
 persons of their owners, their use is saleable. 
 Labour-power must be regarded as an agent in 
 
22 PRODUCTION AND CONSUMPTION.. 
 
 production on the same footing with inanimate ma- 
 chinery ; the two are constantly changing places as 
 well as co-operating in production, and it is essential 
 that they should be brought under some common 
 term expressive of the element of productive value 
 which they both possess. 
 
 In order to realise clearly the fuller meaning here 
 assigned to wealth, we may adopt the following 
 classification : 
 
 I. All commodities, or things on the way to become 
 commodities (i.e., a. raw materials, )3. unfinished goods, 
 j. finished goods, 8. commodities). These objects of 
 commerce may be sub-divided into 
 
 A. Material, e.g., shoes in their finished or earlier 
 
 stages of production. 
 
 B. Non-material, e.g., a song or a professional 
 
 opinion in its final or earlier stages of pro- 
 duction. 
 II. The agents in production of commodities : 
 
 A. Material : consisting in, 
 
 ( ..) Natural agents, including land, mines, 
 &c. 
 
 (.) Plant : buildings and machinery of 
 commerce, either finally constructed, 
 or in process of construction. Money 
 as part of the machinery of exchange 
 comes under this head. 
 
 B. Non-material : labour-power, comprising man- 
 
 ual strength and skill, intelligence, honesty, 
 &c., of those men engaged in the work of 
 production, either of commodities or of the 
 material machinery, or of those engaged in 
 the furtherance of effective labour-power. 
 
PRODUCTION AND CONSUMPTION. 23 
 
 Keeping still in view the fact that the whole 
 structure of commerce is designed to supply commodi- 
 ties to consumers, and returning to the division of the 
 various phases in the production of commodities 
 which we have already noticed, we shall obtain a 
 clear idea of a certain necessary apportionment of the 
 various forms of wealth in accordance with the work 
 they are to do as agents or material of production. 
 The commercial necessity which compels every com- 
 modity to pass through a number of earlier stages of 
 existence in the gradual acquisition of its full value, 
 requires also that at each stage there shall be situate a 
 supply of machinery of production to assist it in its 
 onward journey. Thus the whole organism of com- 
 mercial life may be rightly represented in relation to 
 the work of producing commodities, and will present 
 the following picture : 
 
 R. M. (Natural Agents. Plant. Labour). 
 
 R.M.' 
 
 R.M.* 
 
 Goods 
 
 (~* i 
 
 ** 
 
 G 2 
 
 ^ 
 
 ShopG. 
 Com. 
 
 At each step in the process there will be a portion 
 of the raw material on its way to become a com- 
 modity, a portion of natural agents in the shape of 
 land, &c. (important in production of agricultural 
 commodities, less important in other cases), a portion 
 of plant in the shape of factories, storehouses, and 
 machinery, and a portion of human labour. 
 
 In a well-organised industrial society it is evident 
 
24 PRODUCTION AND CONSUMPTION. 
 
 that these three agents in production (natural agents, 
 plant, labour) will have a definite relation to the 
 work they are to do at each stage in the process of 
 production ; that is to say, they will bear, both as a 
 whole and singly, a definite proportion to the quantity 
 of raw material in its various stages which it is their 
 business to assist. Given the amount of R. M. 1 or 
 R. M. 2 on its way to become commodities, a certain 
 definite amount of each of the agents in production 
 will be required to assist in furthering the work. An 
 excess of all or any of these agents in production at 
 any stage in the process is useless, and will not exist 
 in a perfectly constructed commercial society, a defi- 
 ciency of all or any of the same will impede the 
 proper progress of some portion of raw material and 
 will render useless a portion of agents at the further 
 stages corresponding in amount to the deficiency. If, 
 for example, to return to the process of producing 
 shoes, there at any time existed more shoemaking 
 machinery than was required for working into shoes 
 the leather in stock, there would be a mere waste of 
 so much machinery ; if, on the other hand, there were 
 a deficiency in the same machinery, not only would a 
 certain amount of leather remain unmade into shoes, 
 but a certain proportion of the capital of shoe mer- 
 chants and retailers which was to have been occupied 
 in bringing these shoes into the condition of commo- 
 dities will be rendered useless. We are here, of 
 course, assuming a stable condition of the manufac- 
 turing arts. If a new kind of shoemaking machine 
 be discovered which costs no more to produce, but 
 which will turn out twice as many shoes as the old 
 machines, the amount of capital required at this stage 
 
PRODUCTION AND CONSUMPTION. 25 
 
 in the production of shoes is half what it was before. 
 But, assuming this stability in the arts of production, 
 the amount of capital required at each stage bears an 
 exact and fixed relation to the amount of consump- 
 tion of commodities, and any excess or deficiency 
 throws out of gear the whole machinery of produc- 
 tion. 
 
 Excess or deficiency in natural agents or in labour 
 at any point in the process will produce a similar 
 result. In the actual world of commerce it is true 
 that this exact relation between the agents in pro- 
 duction and the raw material is seldom reached and 
 never long maintained, but in so far as the actual state 
 errs from this ideal there is a loss of economic 
 energy. 
 
 The next step is to clearly recognise that there is 
 a definite quantitative relation between the raw 
 material at the different stages in production (the 
 total amount of raw material, including under the 
 term all goods short of commodity), and the total 
 of commodities. If we were to assume that all raw 
 material on its way to become commodities were 
 obliged to pass through all those stages we have 
 named, R. M., R. M. ', &c., it is clear that in order to 
 supply a definite quantity of commodities there must 
 have been a certain definite and precise amount of 
 R. M., which afterwards assumed the form R. M. 1 , 
 then R. M. 2 , and so on right through the series. In 
 that case a given total of commodities at any time 
 would enable us to tell the exact quantity of R. M. 
 which had previously existed at each of the successive 
 stages in production. Any excess above this amount 
 would have been useless for the proximate end pro- 
 
26 PRODUCTION AND CONSUMPTION. 
 
 duction of commodities, any deficiency would have 
 been impossible. But the simplicity of this calcula- 
 tion is marred by the fact that all commodities are 
 not forced to pass through the same number of stages 
 in production. Some pass straight from R. M. to 
 goods, or have only one intermediate stage ; many 
 goods pass straight into shop-goods without passing 
 through the stages G. 1 , G. 2 . Hence a mere knowledge 
 of the quantity of commodities produced would not 
 enable one to tell the quantitative relation which had 
 previously existed between the raw material at its 
 different stages. , To tell this accurately we should 
 also have to know the character of the commodities 
 produced, so as to clearly recognise through what 
 stages each had passed. Possessing this knowledge 
 of the quantity and nature of any given quantity of 
 commodities, it would be theoretically possible to 
 give an accurate description of the previous condition 
 of the points R. M., R. M. 1 , R. M. 2 , &c., so far as the 
 quantity of raw material situate at each of them were 
 concerned. But we have previously admitted that a 
 definite economic relation must exist between the 
 quantity of raw material at each point and the quan- 
 tity of agents in production. We now, therefore, 
 reach this further step, that a given quantity of com- 
 modities of a known nature determines absolutely 
 the amount of raw material, plus agents in production, 
 previously existent at each stage in the process of 
 production. But the raw material in 'its various 
 states and the agents in production constitute the 
 whole wealth of a community. Therefore a given 
 quantity of commodities of a known nature deter- 
 mines the amount of wealth previously existent at 
 
PRODUCTION AND CONSUMPTION. 27 
 
 each stage so far as the production of these commodi- 
 ties is concerned. It follows, then, that a knowledge 
 of the total of commodities produced at any time in 
 a country would enable us to tell the exact amount 
 of wealth which had previously existed at each stage 
 in the work of production. But if we know the 
 amount of wealth at each stage we know the total 
 amount of wealth. Therefore a knowledge of the 
 total of commodities produced at any time will 
 enable us to tell the total amount of wealth which 
 has previously been engaged or used in the produc- 
 tion of these commodities. Since the only use of 
 wealth from the economic standpoint is to assist in 
 producing commodities, the knowledge of the quantity 
 of commodities produced in a community will enable 
 us to tell the total amount of wealth which has had 
 an economic l existence in the past. We may then 
 state our conclusion thus : 
 
 There is a definite quantitative relation between 
 the total amount of commodities produced in the 
 present, and the total amount of wealth in various 
 shapes which has usefully existed in the past. But 
 the total amount of commodities produced in the 
 present means, as we have seen, nothing else than 
 the present rate of consumption, for a commodity is 
 only finally produced when it is handed over to a 
 consumer. We arrive then at the statement that 
 
 1 By the term ' economic existence ' as applied to wealth, we mean 
 to cover such products as actually function as wealth, excluding any 
 temporary surplus which could have at the time no economic use 
 either for consumption or production. This surplus we consider 
 later. 
 
28 PRODUCTION AND CONSUMPTION. 
 
 there exists at any time a fixed quantitative relation l 
 between the present rate of consumption and the 
 aggregate of wealth which has had an economic 
 existence in the immediate past. 
 
 This is such an obvious truth that it may seem 
 unnecessary to dw r ell upon it so emphatically. 
 But it is, in fact, due chiefly to the neglect of this 
 obvious truth that writers on economics have failed 
 to construct a system which recommends itself with 
 convincing force. We are, therefore, at the risk of 
 being tedious, obliged to reiterate. The law of quan- 
 titative relation applies not only to the relation of 
 the mass of consumption to the mass of wealth, 
 but of the mass of consumption to the several parts 
 of the process of production. If the raw material 
 situate at any time at R. M. does not regularly 
 advance to R. M. ', and in due order pass through all 
 the stages until it becomes commodities, it must 
 accumulate somewhere, and such accumulation will 
 tend to decay, or at any rate stand useless. For 
 example, the stock of milk and eggs possessed by a 
 dairyman at any given time must bear a definite due 
 proportion to his sales of milk, eggs, &c. It is of no 
 use for him to increase his stock of these articles if 
 his sales do not increase. Similarly, the stock of 
 
 1 It must be borne in mind, however, that this law of quantitative 
 relation does not imply that the same quantity of commodities 
 always requires the same quantity of wealth to assist in producing 
 it. The changes in effectiveness of human or machine labour, owing 
 to new inventions, greater manual skill, improved organisation of 
 labour, tScc., are continually altering the proportion of agents in pro- 
 duction required to assist in producing a given quantity of commo- 
 dities. 
 
PRODUCTION AND CONSUMPTION. 29 
 
 milch cows, hens, &c., kept by the farmer must bear 
 a due proportion to his sales of milk, eggs, poultry, 
 &c. ; if his sales increase, so must his stock ; if his 
 sales decrease, so must his stock. What holds of one 
 trade holds of all trades ; the aggregate stock at each 
 stage of production must bear a due relation to the 
 sales effected. In a word, the quantity of wealth in 
 existence and functioning as wealth cannot increase 
 or diminish except in a constant relation with imme- 
 diately future consumption. 
 
 It must be borne in mind, however, that the rate 
 of consumption is not the only thing which limits 
 the amount of wealth which can exist in the form of 
 R. M. or goods or machinery. The number of avail- 
 able labourers or the amount of available natural 
 agents may limit the amount of goods or machinery 
 which can be used for production. It is true that the 
 limit of natural agents is generally not absolute, but 
 in accordance with the law of diminishing return to 
 labour and capital employed in agriculture; but a 
 particular manufacture might be absolutely limited 
 by the amount of R. M. which could be procured. 
 The limit of labourers is an absolute limit. Assuming 
 that all available labourers are working with the 
 utmost skill and energy the maximum quantity of 
 the best machinery, the economic existence of any 
 larger quantity of machinery or of more goods is 
 clearly impossible. Under our definition of wealth 
 we had included commodities, R. M. in its various 
 stages, natural agents and plant, and lastly, labour- 
 power. 
 
 Since, however, a quantitative relation must exist 
 between consumption and wealth, it is evident that 
 
30 PRODUCTION AND CONSUMPTION. 
 
 consumption and production must be similarly related. 
 Every product must either be consumed or added to 
 accumulated wealth, and the fact that a quantitative 
 relation exists between consumption and wealth in- 
 volves the existence of a more or less definite relation 
 between consumption and production. 
 
 There are two alternative theories of the relation 
 between production and consumption, each of which 
 is theoretically possible. The first is that almost 
 universally accepted by the best-known writers on 
 political economy, viz., that production determines 
 consumption under all circumstances, resting on the 
 assumptions that whatever is so produced must be con- 
 sumed, and that nothing can be consumed which 
 has not been produced. The other possible theory 
 is that consumption determines production in that the 
 final cause or end of a process may be rightly said to 
 determine the earlier steps in that process. Now, we 
 state these two theories lest it should be thought 
 that the law of quantitative relation between produc- 
 tion and consumption depends for its validity upon 
 one or other of them. In truth, it depends on 
 neither, but is consistent with and required by both. 
 We are not at present concerned with the discussion 
 whether the amount consumed is determined or 
 caused by the amount produced or the amount pro- 
 duced by the amount consumed, but merely assert 
 that there must exist a quantitative relation between 
 the two. 
 
 We have now to introduce the much-debated term, 
 capital. It would be useless to attempt a full discus- 
 sion of the various definitions of capital. In endea- 
 vouring to give a satisfactory meaning to the word 
 
PRODUCTION AND CONSUMPTION. 31 
 
 two things are necessary. First, that the word shall 
 cover certain definite kinds of wealth ; second, that 
 its meaning shall be kept as near as possible to the 
 ordinary average meaning, for unless it is so kept it 
 would be better even to invent some new collocation 
 of letters rather than introduce a term which is 
 bound to cause confusion. Most definitions of eco- 
 nomists have proved futile because they have aimed 
 at fulfilling too exactly the logical function of defini- 
 tion, and have embodied either a reference to the 
 origin of capital or to the purpose for which it is to 
 be used. 
 
 It has been described as ' the result of saving ' by 
 those who have not yet explained what 'saving' 
 means, and who afterwards appear to include in 
 savings the food which is not saved but consumed by 
 labourers. It is also described as wealth which is 
 ' destined' or 'devoted' to assist future production, 
 so that 'the distinction between capital and not 
 capital does not lie in the kind of commodities, 
 but in the mind of the capitalist,' l and depends 
 on his intention. If we are unable to say whether a 
 particular piece of wealth which exists is or is not at 
 the present time capital, it is absurd to maintain that 
 our term capital can be a useful part of our economic 
 nomenclature. 
 
 As our object is to give a definite meaning to the 
 term which shall enable our readers to know exactly 
 what things are and are not capital, we offer what is 
 rather a description than a definition, and say that 
 capital is that wealth which by its use directly assists 
 production. But even this description is far too wide, 
 
 1 Mill, ' Pol. Econ.,' Book L, Ch. IV., s. 1. 
 
32 PRODUCTION AND CONSUMPTION. 
 
 and it will presently be necessary to exclude certain 
 kinds of wealth in order to trim our term to a closer 
 accord with the ordinary meaning of the term. 
 What are the kinds of wealth which, by their use, 
 directly assist production ? They would seem to in- 
 clude : i. Plant and all machinery. 2. Raw material 
 and goods in their various stages of development. 
 
 3. Labour-power (including skill, honesty, &c.) 
 
 4. Natural agents, land, mines, &c. 5. Commodi- 
 ties which, by their consumption, assist to produce 
 labour-power. Now it is clear that if capital is to 
 include all these forms, not only will it have passed 
 far beyond the bounds of its ordinary use, but we 
 shall require another term when we come to deal 
 with the relations between the landowner, the 
 employer of labour, and the labourer in regard to the 
 sharing of the commodities they assist to produce. 
 This broad meaning would include all wealth except 
 luxuries in the hands of consumers ; that is to say, 
 those commodities which, by their consumption, do 
 not minister either directly or indirectly to our pro- 
 ductive energy, and which, since they cannot be 
 entirely without effect, must be considered rather as 
 impairing that energy, and deserving rather the appel- 
 lation of 'illth' than that of wealth. The absurd 
 attempt to include under capital the food and clothing 
 of labourers, so far as it conduces to assist labour- 
 power, sins both by making it impossible to say 
 whether a particular piece of wealth is capital, and 
 by militating against the common commercial meaning 
 of the term. 
 
 Let us now turn to the different kinds of wealth 
 which seem to fall under our description of capital, 
 
or THE 
 
 UNIVERSITY 
 PRODUCTIOfoAND CONSUMPTION. 33 
 
 and by excluding what is necessary, restore the 
 term to its most convenient economic use. Since 
 both convenience of economic treatment and com- 
 mon usage exclude labour-power from capital, it is 
 clear that it must be excluded. Since commodities 
 consumed by producers only affect production in- 
 directly, through their effect on labour-power, they 
 must also be excluded. The case of land and 
 other natural agents is rather different. It should 
 be remarked that none of the economic defini- 
 tions of capital have succeeded in excluding the 
 value of land. For not only is land in large measure 
 ' destined ' to assist the production of wealth, but its 
 value is, in fact, 'the result of past labour.' Not only 
 does this last statement apply to the value put into 
 land by landlords' or tenants' improvements, but also 
 to the value created by the growth and activity of 
 the community which forms what is now commonly 
 known as the 'unearned increment.' Thus the whole 
 value of land, alike that for which economic rent is 
 paid and that which gets the average return of profit 
 on capital invested, is the result of the work either of 
 individuals or of the whole community, and may be 
 said to be ' saved ' or stored to assist future produc- 
 tion. But while no definition can of right banish 
 land value from capital, expediency may and does 
 demand that it be treated separately, at least so far 
 as that value not due to recent improvements is 
 concerned. In so far as land and other natural 
 agents stand distinct from the body of capital, and it 
 is found convenient to treat them separately, in 
 economic theory as in the actual calculations of 
 commerce, we shall exclude them from our meaning 
 
 B 
 
34 PRODUCTION AND CONSUMPTION. 
 
 of capital. We are now in a position to sum up the 
 kinds of wealth which it is convenient to include 
 under capital. They are, in fact, the first two of the 
 five groups which fell under our former description, 
 namely (i) Raw material and goods in their various 
 stages of development, including shop-goods ; (2) 
 plant and all machinery. 
 
 The distinction between what is capital and what 
 is not capital, so far as the production of material 
 forms of commodities is concerned, will be now quite 
 clear ; but, with regard to the production of non- 
 material commodities, there occurs a difficulty for 
 which no adequate solution can be found. Should 
 the singing-lessons which assist in that voice-produc- 
 tion which is to produce a commodity, songs, be 
 regarded as labour or as non-material machinery ? If 
 the former, it is not capital ; if the latter, it is. Or, 
 again, is the work of examination-crammers to be 
 regarded as a machine for producing passes, for these 
 last are both commodities and instruments? The 
 same difficulty applies to all that class of commodi- 
 ties commonly called sendees. So far as the efforts 
 which produce them are concerned, the latter may 
 be regarded either as labour or as non-material 
 machinery. It would be more consistent with our 
 theory to regard them as machinery, but common 
 parlance would be inclined to describe them as forms 
 of labour. Since, however, the theory of production 
 and consumption is best illustrated from material 
 forms of wealth, we may be content to leave it an 
 open question whether the operations which produce 
 services shall be classed as labour or as capital. 
 
 Having now assigned a clear meaning to the term 
 
PRODUCTION AND CONSUMPTION. 35 
 
 capital, we must bring the latter into relation with 
 consumption. We have already seen that the dif- 
 ferent portions of this capital which function at the 
 various stages in the process of production stand 
 in a definite quantitative relation to the amount 
 of immediately future consumption. We are there- 
 fore entitled to say that this future consumption 
 limits the amount of capital which can economically 
 exist in the present. If more capital should at any 
 time exist than is required to assist in supplying 
 future consumption, this excess is not real capital, as 
 it cannot perform the true function of capital ; it is 
 merely nominal capital. That such excess of capital 
 in any single trade may exist is, of course, readily 
 acknowledged. The surplus may sometimes escape 
 our notice from the fact that it does not necessarily 
 stand quite idle. If in a certain factory there are 
 twice as many machines as are required to do the 
 work, either half of them may stand idle or all of 
 them may be used for half-time or at half-pressure ; 
 in either case we should say that the real capital 
 consisted in half the machines, the other half being 
 surplus or nominal capital. 
 
 Now, whether this distinction is, in fact, applicable 
 to commerce as a whole we are not yet in a position 
 to assert. We can, however, say that, assuming it to 
 be possible that the capital of a community at any 
 time is more than is economically required to supply 
 the commodities which that community consents to 
 consume in the future, that excess will not be real 
 but nominal capital. This distinction assumes a 
 greater importance when it is applied to the fund 
 from which capital is drawn, savings. If future con- 
 
36 PRODUCTION AND CONSUMPTION. 
 
 sumption assigns a limit to real capital in the present, 
 it must also assign a limit to .real saving. Now, the 
 idea of any possible limit to the present efficient 
 thrift of a community imposed by the condition of 
 future consumption is one which almost all economic 
 writers have steadily refused to entertain. We must, 
 however, maintain that, assuming it to be possible 
 that some capital can exist in excess of what is 
 required and be merely nominal capital, it would 
 follow that the saving which provided that capital 
 was not real but nominal saving. 
 
 What is saving ? If a community consumes annually 
 as much wealth as it produces, it obviously does not 
 save. If it consumes less than it produces, the dif- 
 ference accumulates, and is called ' savings. ' Savings,' 
 then, are the difference between what is produced 
 and what is consumed. The correct formula is as fol- 
 lows, Production consumption savings. Since we 
 can conceive production indefinitely increased and 
 consumption maintained at a minimum, it is clear that 
 this formula places no limit on savings. But just as 
 real capital is capital for which there is a use, so real 
 savings are savings for which there is a use, and, 
 assuming that any portion of this difference between 
 production and consumption goes to furnish merely 
 nominal capital, it would obviously not find a use, 
 and would be rightly distinguished as nominal 
 saving. 
 
 Now, we are fully aware that almost all writers on 
 economics will scoff at this distinction between real 
 and nominal capital and saving as ' mere moonshine,' 
 so firmly rooted is their conviction that whatever is 
 produced will be consumed, and that there is no pos- 
 
PRODUCTION AND CONSUMPTION. 37 
 
 sible limit to the amount of capital that is wanted in 
 a country. They utterly refuse to entertain the 
 notion that any wealth which is ' saved ' in the sense 
 of being kept from immediate consumption can be 
 useless for the purpose of assisting production. Thrift 
 is the source of national wealth, and the more thrifty 
 a nation is the more wealthy it becomes. Such is 
 the common teaching of almost all economists ; many 
 of them assume a tone of ethical dignity as they 
 preach the infinite value of thrift ; this note alone in 
 all their dreary song has caught the favour of the 
 public ear. It is not, however, with the ethical value 
 of saving that we are concerned, but with the economic 
 doctrine of the possibility of infinite saving and the 
 use of infinite capital. 
 
 To all who have followed our argument thus far, 
 as, indeed, to all who have ever considered the func- , 
 tion of capital, it should be clear that the capital of a 
 community cannot be advantageously increased with- 
 out a subsequent increase in consumption of com- 
 modities. A belief in the infinite possibility of saving 
 implies, therefore, a belief in the infinite increase of 
 consumption. In Chapter IV. we shall deal with the 
 assertion that an increase in production forces a cor- 
 responding increase in consumption. But here we 
 would call attention to the fact that there is a school 
 of economic writers who have signally failed to 
 recognise that every increase in saving and in capital 
 requires, in order to be effectual, a corresponding in- K 
 crease in immediately future consumption. They will 
 not admit that if people wish to save more now they 
 must consent to spend more in the future. Since 
 Mr. Mill, more than any other, is responsible for the 
 
38 PRODUCTION AND CONSUMPTION. 
 
 popularity of this theory of the possibility of infinite 
 saving and infinite capital, it will be worth while here 
 to briefly examine his position. 
 
 Mr. Mill has two positions on the subject of saving. 
 One is that saving may increase indefinitely without 
 reference to increased consumption ; the other, depen- 
 dent on the former, consists in a contradiction of the 
 assertion, ' production consumption = saving,' by 
 maintaining that "everything which is produced is 
 consumed, both what is saved and what is said to be 
 spent." l Now, by increase of saving, Mill only means 
 one thing addition to the wages-fund. If his capi- 
 talists refuse to consume their usual luxuries, the result 
 of their abstinence, the savings, go to swell the wages- 
 fund ; either more labourers are employed, or the 
 labourers already employed get higher wages. If 
 there are no more labourers to employ, ' the whole 
 of what was previously expended in luxuries, by 
 capitalists and landlords, is distributed among the 
 existing labourers in the form of additional wages. 
 We will assume them to be already sufficiently sup- 
 plied with necessaries. What follows ? That the 
 labourers become consumers of luxuries ; and the 
 capital previously employed in the production of 
 luxuries is still able to employ itself in the same 
 manner, the difference being that the luxuries are shared 
 among the community generally, instead of being con- 
 fined to a few.' 2 It is clear that this process is capable of 
 indefinite expansion ; the wages-fund is a bottomless 
 fund into which any quantity of savings may be 
 poured. If all savings (beyond what is required to 
 
 1 Mill's ' Pol. Econ.,' Book L, Ch. V.. s. 3 and s. 6. 
 a Book I., Ch. V., s. 3. 
 
 ! 
 
 
PRODUCTION AND CONSUMPTION. 39 
 
 make such additions to plant and R. M. as increase 
 in consumption may render desirable) goes into wages- 
 fund, and for that reason ranks as economic saving 
 and economic capital, it is clear that there is no limit 
 assigned to saving and capital by any consideration of 
 future consumption. If a mere addition to wages- 
 fund is effectual saving, not only does future con- 
 sumption place no limit on capital, but not even does 
 production. An increase in the wages-fund, the result 
 of which is to enable labourers to consume luxuries, 
 obviously adds nothing to their producing power. 
 Mill's theory, then, admits an indefinite expansion of 
 capital, without any effect either on production or 
 consumption. It is true he is not consistent in his 
 language, but speaks in one passage of ' an increased 
 production,' which apparently is to follow 'the in- 
 creased accumulation,' and which ' might, rigorously 
 speaking, continue, until every labourer had every 
 indulgence of wealth consistent with continuing to 
 produce.' * But why or how this increase of produc- 
 tion should take place he does not explain. He does 
 not assume, nor would he have any right to assume, 
 a surplus of unemployed labour. How, then, can 
 the increase of wages-fund have any result in in- 
 creasing production ? If it cannot increase produc- 
 tion, what motive can induce capitalists to save? 
 The only conceivable motive at work could be a 
 desire to present to their labourers the luxuries which 
 they refused to consume themselves. And this act of 
 amiable and foolish philanthropy is what Mill means 
 by ' saving.' His process of reasoning is apparently 
 
 1 Book I., Ch. V., s. 3. 
 
40 riUUU'CTHlX AXD COXSUMI'TICX. 
 
 this: the wages-fund, however large or small, is 
 always productively employed, for it is used to assist 
 labour to produce wealth; by abstaining from my 
 usual luxuries I can increase the wages-fund ; there- 
 fore I can add to the productive employment of 
 wealth. It is evident that Mill's ' savings/ which go 
 to increase the luxuries of the "working man, are not 
 real or economic savings. 
 
 To ascertain the exact point at which Mill's argu- 
 ment is vitiated by error, it is only necessary to test 
 his extreme hypothesis (quoted above) by assuming 
 that a farming landowner gains as rent and profit 
 from his land ..1,100 a-y ear, and that he pays away 
 to twenty labourers .1,000 a-year (.50 a-year 
 each). The gross income derived from the land is 
 thus .2,100 a-year, and the whole of this sum is 
 distributed to all concerned and consumed. Subse- 
 quent to the supposed abstinence, the farming land- 
 owner, instead of taking . 1,100 for himself and 
 paying his labourers .50 a-year each, distributes 
 the gross income of the farm, .2,100, amongst 
 the twenty-one individuals concerned (the twenty 
 labourers and himself) equally, each receiving . 100 
 a-year. It is evident that, under these circumstances, 
 Mill is quite right in asserting that there is no decrease 
 in consumption. The labourers consume just as much 
 more as the landowner consumes less, or, as Mill puts 
 it, ' luxuries are shared among the community gene- 
 rally instead of being confined to a few.' But it is 
 evident that Mill is wrong when he infers, as his 
 argument requires, that the landowner is saving 
 . 1,000 a year (the sum by which he has reduced his 
 personal expenditure). The gross income derived from 
 
PRODUCTION AND CONSUMPTION. 41 
 
 the farm is . 2,100 a-year, and the whole of this sum 
 is expended as absolutely and completely in the one 
 case as the other, and it is quite evident that the 
 landowner saves nothing by his abstinence. If, as 
 Mill's argument requires, he saves . 1,000 a-year, then 
 the aggregate consumption must be reduced to . 1,100 
 a-year ; but if this is the case, the labourers' wages 
 are not raised, and they derive no direct benefit from 
 the landowners' saving operations. Mill, therefore, 
 is incorrect when he states that in this hypothesis 
 the ' rich ' lay by, from conscientious motives, the 
 surplus of their profits : the rich do nothing of the 
 sort ; they cease to expend their incomes themselves 
 and hand over these unexpended incomes as a free 
 gift to their labourers, but they effect no saving of 
 any sort, and nothing is ' laid by.' The hypothesis, 
 therefore, fails absolutely to answer the problem 
 with which Mill is dealing, whether, ' 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.' All that the hypothesis proves is, that 
 if some individuals cease to spend the whole of their 
 incomes themselves, and give away the surplus por- 
 tions to others who do expend them, then no undue 
 accumulations will result, a conclusion with which we 
 entirely agree. 
 
 Mill, in fact, does not merely ignore the considera- 
 tion of how his increased capital is represented in an 
 increase of production and consumption, but he 
 further contradicts the self-evident proposition, ' pro- 
 
42 PRODUCTION AND CONSUMPTION. 
 
 duction consumption = saving/ by maintaining 
 the tenet that 'what is saved is consumed equally 
 with what is spent.' His words are these : ' Every- 
 thing which is produced is consumed ; both what is 
 saved and what is said to be spent, and the former 
 quite as rapidly as the latter.' ' ' The word saving does 
 not imply that what is saved is not consumed, nor 
 even necessarily that its consumption is deferred ; but 
 only that if consumed immediately it is not consumed 
 by the person who saves it.' 2 It might at first appear 
 that when Mr. Mill maintained that savings were 
 consumed, he meant those savings accumulated in the 
 shape of plant, machinery, &c., the material forms 
 of which are gradually destroyed in the use made of 
 them ; ' consumed,' in this sense, would be synony- 
 mous with ' used.' But when he adds that ' what is 
 saved' is consumed ' quite as rapidly as what is spent,' 
 it is clear that he is thinking only of those savings 
 which go to swell the wages-fund. Now, in what 
 sense can these be said to be saved ? Mr. Mill 
 would reply that they are saved in the sense that 
 they form a part of capital and are productively con- 
 sumed. That which goes into the wages-fund is, 
 ipso facto, l productively consumed.' The capitalists 
 abstain from consuming luxuries, thereby increasing 
 the wages-fund, so that the labourers consume the 
 luxuries which the capitalists denied themselves. This 
 consumption of luxuries by the labourers is to be 
 productive consumption, though the consumption of 
 the same articles by the capitalists is unproductive 
 consumption. The only difference is, that the same 
 luxuries are in the one case consumed by one class 
 
 ' Book I.. Ch. V., s. 6. ' I., V., s. r>. 
 
PRODUCTION AND CONSUMPTION. 43 
 
 of people ; in the other case, by another class. The 
 formal act of having formed a part of a wage-fund 
 entitles these articles to rank as wealth which has 
 been productively consumed. In what sense were 
 they productively consumed ? True, they are con- 
 sumed by a class of ' producers/ but we must not 
 forget that the capitalist is also a producer. They 
 are not any more than before consumed in such a 
 way as to assist production. Mr. Mill has shown no 
 way in which an indefinite increase of his wages-fund 
 increases production .; he has not made good his con- 
 tention that 'every increase of capital gives, or is 
 capable of giving, additional employment to in- 
 dustry.' l The same wealth is used in the same 
 way by two different classes of people ; in the 
 one case it is said to be spent, in the other to be 
 
 1 I., V., s. 3. Prof. Fawcett, though he follows Mill, as usual, in 
 reckoning as capital everything which has formed part of a wages-fund, 
 admits that there is a difference between this nominal capital and real 
 capital; in fact, that there is capital which cannot function as 
 capital. ' It has been shown in this chapter that the capital which 
 at any time exists in a country is always sufficient to administer to 
 the production of a much greater amount of wealth than that 
 which is produced ; in other words, the production of wealth which 
 actually takes place might be effected with the aid of much less 
 
 capital than the amount which is applied ' ' For instance, every 
 
 shilling of the labourers' wages which is expended upon anything 
 but the mere necessaries of life might be destroyed without affecting 
 the industrial efficiency of the labourer, and consequently without 
 diminishing the future production of wealth ' (' Pol. Econ.,' Book I., 
 Ch. IV.). But Mr. Fawcett does not explain why he speaks of this 
 portion of the wages as capital at all : it is not covered by his defi- 
 nition of capital as ' the wealth which is not immediately consumed 
 unproductively, and which may, consequently, be devoted to assist 
 the future production of wealth ' (p. 19). There is no possible way 
 open whereby this portion of the labourers' wages can assist the 
 future production of wealth. 
 
44 PRODUCTION AND CONSUMPTION. 
 
 saved. It is clear that if wealth be added to the 
 wages-fund which cannot be productively used, it 
 cannot be rightly said to be saved. It is consumed 
 just as soon, in the same manner and with no different 
 results, whether it be labourers' luxuries or capitalists' 
 luxuries. It is, in fact, neither saved nor produc- 
 tively consumed. What motive can have induced 
 capitalists to thus increase the wages-fund without 
 increasing the amount of production or the sum of 
 gross profits for themselves, it is impossible to 
 imagine. Mr. Mill himself acknowledges that " when 
 these classes turn their income into capital they do 
 not thereby annihilate their power of consumption ; 
 they do but transfer it from themselves to the 
 labourers, to whom they give employment." But he 
 does not seem to recognise that by thus increasing 
 the wages-fund they give no more employment ; that, 
 in fact, the wealth they hand over is consumed just as 
 unproductively as before, and is in no sense saved. 
 
 Of course throughout this argument we have 
 accepted Mill's supposition, that there is no new 
 or unemployed class of labourer whose work and 
 wants are to be considered. But even in the state- 
 ment of this alternative case Mill's argument is 
 confused and incorrect. His words are as fol- 
 lows : ' Either there is or is not an increase of 
 their numbers (i.e., of labourers) proportional to the 
 increase of capital. If there is, the case presents no 
 difficulty. The production of necessaries for the new 
 population takes the place of the production of 
 luxuries for a proportion of the old, and supplies 
 exactly the amount of employment which has been 
 lost.' Now, in the first place, this idea, that before a 
 
PRODUCTION AND CONSUMPTION. 45 
 
 new population can be set to work at all a separate 
 stock of necessaries has to be got together and added 
 to the previous wages-fund, will be seen to be totally 
 erroneous. In the second place, assume that this 
 stock of necessaries were added to the wages-fund 
 and used to employ the new labourers, the difficulty 
 is only got over for the moment. A new difficulty 
 arises. What about the wealth produced by the new 
 labourers ? How is it to be consumed ? The new 
 labourers have already got a stock of necessaries pro- 
 vided for them in the new wages-fund, constantly 
 maintained by a continuance of the former abstinence 
 of the capitalists. The wealth, then, which the new 
 labourers produce must either go to provide luxuries 
 for themselves or for the old class of labourers, or it 
 must provide luxuries for the capitalists, who will thus 
 be obliged to revoke their vow of abstinence. To 
 one or two or all of these uses it must be put, and in 
 any case it will be unproductively consumed in the 
 shape of luxuries. 
 
 It follows, then, alike from the a priori principle 
 embodied in the law of quantitative relation and 
 from consideration of its application in the cases 
 adduced by Mr. Mill, that an indefinite increase of 
 effective saving and of capital is impossible, unless a 
 corresponding increase in immediately future con- 
 sumption takes place. 
 
 It is easy to understand how Mill, and those who 
 held with him the theory of a special wages-fund, 
 could see no necessity for assigning a limit to the 
 amount of effectual saving which a community might 
 accomplish. This wages-fund was a bottomless 
 vessel into which you might go on pouring any 
 
46 PRODUCTION AND CONSUMPTION. 
 
 amount of saving without any chance of an overflow 
 or surplus. If the class of saving individuals were 
 content to abstain from consuming, and to hand over 
 continually to productive labourers their command 
 over commodities without seeking anything in return, 
 there is no reason why they should not do so, and 
 call it ' saving/ if they prefer the term. But most 
 modern economists have rejected this theory, recog- 
 nising that no motive was provided which could 
 invite saving individuals to increase indefinitely this 
 wages-fund, since labourers would not thereby become 
 more productive, and if they did the saving indivi- 
 duals would not be willing to consume the increase 
 of products. But, strange to say, those who have 
 most distinctly repudiated the wage-fund theory have 
 retained the theory of the possibility of infinite saving 
 which depended on it. We still hear from econo- 
 mists constant commendation of indiscriminate thrift ; 
 with a steady fall of profit before their face they do 
 not recognise th$ possibility of an excess of saving ; 
 that however much is saved all can find a full 
 economic use in assisting further production, is 
 accepted as an axiom of their economics. The fol- 
 lowing sentences of Mill still represent the accepted 
 theory of saving : " The fund from which saving can 
 be made is the surplus of the produce of labour after 
 supplying the necessaries of life to all concerned in 
 the production ; as much as this, though it never is 
 saved, always might be." " The amount of this fund, 
 this net produce, this excess of production over the 
 physical necessaries of the producers, is one of the 
 elements that determine the amount of saving. The 
 greater the produce of labour after supporting the la- 
 
PRODUCTION AND CONSUMPTION. 47 
 
 bourers, the more there is which can be saved." ] Now, 
 we would ask our readers to put the question clearly 
 to themselves. Could a community save all it could 
 produce with the exception of necessaries of life ? If 
 saving be taken merely to mean ' not consuming/ it 
 is obvious that this is possible. But saving means 
 something more than this. It signifies not only 
 abstention from consumption, but application as a 
 means of further production. If the whole of this 
 surplus can be saved, it must be necessary then to 
 show that it can be used to produce other things 
 which are wanted. If it is not used to assist in pro- 
 ducing other things, or if the other things are not 
 wanted, the saving is in vain, or rather, it is not saving 
 but mere waste. 
 
 Turning to the sentence quoted from Mill, let us sup- 
 pose the total produce of a community to be represented 
 by one hundred, and that out of this forty sufficed to 
 supply ' the necessaries of life to all concerned in the 
 production,' and that the other sixty were hitherto 
 consumed as luxuries, would it be possible, instead of 
 consuming these sixty as luxuries, to save them and 
 apply them in assisting further production ? To the 
 question thus put the answer is plain. Not merely is 
 there already sufficient capital to aid production of 
 ' the necessaries of all concerned in the production,' 
 but capital previously applied to produce the luxuries ; 
 the result would be that not merely is there no use 
 for the new increment of capital, but of that pre- 
 viously existing the portion hitherto devoted to the 
 production of luxuries can no longer be used. Con- 
 Mill, 'Vrin. Pol. Econ. ; ' Book I., Ch. XL, s. 1. 
 
48 PRODUCTION AND CONSUMPTION. 
 
 sumption being reduced from one hundred to forty, 
 it is obvious that either production must be reduced 
 in like proportion, in which case the aggregate of 
 capital required will be similarly reduced, or articles 
 will be produced for which there is no use present or 
 prospective. 
 
 Again, let us look at the effects, in a more concrete 
 form, of a general endeavour to save the whole of 
 the surplus of the produce of labour. Consumption, 
 which previously included (i), the necessaries of pro- 
 ductive labourers ; (2), the necessaries of others than 
 productive labourers ; (3), all luxuries ; would now be 
 confined to the first of these three classes. It is evi- 
 dent, in the first place, that all the portion of the 
 stock of the community which previously served to 
 satisfy the desire for luxuries can no longer be so ap- 
 plied, and since there is no other use for it present or 
 prospective, this stock must be absolutely valueless, 
 and the fortunes or savings of individuals which existed 
 in these forms of capital must be extinguished. Thus, 
 for example, let it be assumed that every form of 
 potable alcohol is included in the term ' luxury,' the 
 existing stocks of wine, beer, and spirits will now be 
 absolutely without value, and the fortunes, savings, 
 &c., which they represent will be destroyed. Simi- 
 larly, all other materials of luxury will become as 
 worthless as alcohol to a community of rigid tee- 
 totallers. The value of a commodity depends upon 
 the present or prospective existence of a consumer, 
 who will be able to give an equivalent for it. So, if 
 all consumption of luxuries ceased, the value of all 
 existing materials of luxury is destroyed. 
 
 As to the second class, comprising the necessaries 
 
PRODUCTION AND CONSUMPTION. 49 
 
 of others than productive labourers, this will be 
 equally void of value under the new condition. For 
 those necessaries cannot be applied to increase the 
 stock of necessaries of productive labourers, for this 
 stock is already sufficient, and any increase would be 
 either in the form of waste or luxury. 
 
 Since the only commodities to be consumed or 
 enjoyed are the necessaries of productive labourers, 
 there could be no object in producing anything but 
 these necessaries. Now, the plant already in existence 
 sufficed to replace the current consumption of all 
 necessaries of producers and non-producers and all 
 luxuries. All that portion of this plant not devoted 
 to aiding the production of necessaries for producers 
 is now r rendered absolutely valueless, and the fortunes 
 and savings represented therein are destroyed. 
 
 It will thus seem obvious that if the community 
 limits its consumption to the necessaries of produc- 
 tive labourers, the only stock which can be of use is a 
 stock of these necessaries, and the only plant which 
 can be of use is the plant required to replace the 
 necessaries consumed. The accumulated wealth per 
 head of the population will thus be reduced to the 
 lowest sum compatible with its continued existence. 
 If we assume that in such a community as England 
 one-half of the consumption consists of luxuries, the 
 reduction in accumulated wealth per head thus brought 
 about would be one-half, and, until the consumption 
 per head of the community again increased, could not 
 exceed that amount. The whole of the argument 
 contained in this contention is so brief and so simple, 
 it ought to require to be stated only once to find 
 ready acceptance. If the community ceased to wear 
 
 B 2 
 
50 PRODUCTION AND CONSUMPTION. 
 
 clothes, and limited its consumption to bread and 
 cheese, what stock or what plant could be required 
 or could possess exchange value other than that 
 required to replace the current withdrawals of bread 
 and cheese ? 
 
 Neither Mill nor the English economists since Mill, 
 who have dealt with the increase of capital, have 
 pointed out how any increase in economic capital is 
 thus absolutely limited by the condition of future 
 consumption of commodities. And when we say 
 future consumption, we do not refer to a future of 
 ten, twenty, or fifty years hence, but to a future that 
 is but little removed from the present. If we con- 
 sider that part of capital which is devoted to retail- 
 ing, it is evident that so soon as the stock of shop 
 goods exceeds the quantity required to enable con- 
 sumers to purchase the exact articles they require, 
 with the maximum convenience to all concerned, the 
 excess is over-supply. For instance, if .v shop goods 
 are sufficient to enable the current consumption to be 
 supplied, any stock in excess of this total would be 
 over-supply. If the stock of shop goods increases, a 
 corresponding increase in consumption must at once 
 take place, or the stock of shop goods will exceed the 
 total that is economically desirable and over-supply will 
 exist. When we follow back the processes of pro- 
 duction, it is true a larger time element intervenes, 
 but even here it must not be forgotten that the habits 
 of the community are more or less regular and 
 settled. If saving is being effected, not merely 
 during one day or one week, but regularly and 
 habitually, the constantly increasing total of capital 
 thus brought about will require a regular and habitual 
 
PRODUCTION AND CONSUMPTION. 51 
 
 increase in the rate of consumption to prevent over- 
 supply in the earlier stages of production. ' In addi- 
 tion to the limit imposed by the rate of consumption 
 there is further the limit imposed by the other two 
 requisites of production ; so soon as every labourer is 
 provided with the plant and raw material requisite to 
 his most efficient labour, or so soon as all the plant, 
 &c., is provided requisite to the most efficient appli- 
 cation of all the natural agents available, it is evident 
 that no further accumulations of capital can be used, 
 and must, if accumulated, remain idle and exist as 
 over-supply. 
 
 If increased thrift or caution induces people to save 
 more in the present, they must consent to consume 
 more in the future. If they refuse to assent to this 
 condition, they may persist in heaping up new 
 material forms of capital, but the real effective capital 
 will be absolutely limited by the actual extent of their 
 future consumption. It is necessary to strenuously 
 insist on this conclusion, since the want of a clear 
 recognition of it prevents not only business men, but 
 students of economics, from a proper understanding of 
 the machinery of commerce. Our distinction between 1 ^ 
 real and nominal capital is, then, as follows : The 
 nominal capital is a mere body, the real capital the 
 same body so far as it is animated by productive 
 force in economical work ; the same amount of this 
 productive force may occupy a larger or a smaller 
 number of material forms. If the future consump- 
 
 1 Maintaining the existing stock of plant in repair and replacing 
 it with new when worn out is not saving, it is merely keeping the 
 existing total of capital intact. No individual or community can be 
 said to save unless it increases its aggregate total of capital. 
 
52 PRODUCTION AND CONSUMPTION. 
 
 tion which limits the amount of real capital which 
 can exist in the present be x., we shall have at each 
 of the stages in the process of production, viz., 
 R. M., R. M. ', R. M. 2 , &c., a certain definite amount 
 of capital, both in the form of material of production 
 and of machinery. This we will denote by y. The 
 following, then, will denote the actual economic con- 
 dition of commerce at any given time : 
 
 KM. K.M. 1 K.M:* Goods. G. 1 Shop Goods. Commod. 
 
 y. y- y. y- y- y- x. 
 
 Now, while x. represents a definite quantity of 
 forms of commodity for consumption, the number of 
 material forms which constitute y. at any point may 
 be greater or smaller in accordance with the strictness 
 of economy which marks the process of production. 
 The supply of x. commodities only requires that a 
 certain number of forms of material should be trans- 
 formed from R. M. to R. M. 1 , and from R. M. 1 to R. M.' 2 , 
 and so on, and only requires the working of the 
 smallest amount of machinery which suffices to perform 
 this work. But at any of these points there may be 
 found more than this requisite quantity of material 
 forms or machines. In this case there is not more 
 real capital than there would otherwise have been, 
 but the same amount of real capital is distributed 
 over a larger number of forms, the same quantity 
 -of producing power animates more faintly a 
 larger number of producing bodies. Of course, if, 
 owing to such excess of forms, any number of these 
 forms stood absolutely idle, they could, hardly, be 
 recognised to have any claim to be called capital. But 
 it is possible that there should be an excess of forms 
 
PRODUCTION AND CONSUMPTION. 53 
 
 of material or machine capital at any point, and that 
 none of this should stand absolutely, or in any degree, 
 idle. To return to our old example of the production 
 of shoes, it is possible that there may be twice as much 
 hides and twice as much machinery engaging in tan- 
 ning as is required for the production of leather com- 
 modities for future consumption. It is not even 
 necessary to suppose that the whole of the machinery 
 does not work at full force. Double the amount of 
 work and double the amount of production may go 
 on at this point, but the amount of real capital 
 employed there, from the point of view of the produc- 
 tion and consumption of the community, is just the 
 same as if half the work had been done with half the 
 hides and half the tanning machinery. We are not 
 saying that the capital is the same from the point of 
 view of the individual tanner, or of the whole body of 
 tanners. We shall presently see that capital and 
 saving is, or may be, entirely different, as we look at 
 them from the individual point of view and that of 
 the community. Here we are only concerned with 
 the production and consumption of the entire com- 
 munity. The production and consumption of the 
 community only requires that a certain definite amount 
 of tanning work should be done, and the real tanning 
 capital from its point of view is the smallest amount 
 of hides and machines requisite to do this amount of 
 tanning. Assuming that more than this requisite 
 amount of the forms of capital exists, it is nominal 
 capital in excess of what the community requires ; it is, 
 in a word, over-supply. That such over-supply or 
 excess of capital might exist at any one stage, or in- 
 deed in all the stages, in the production of one or more 
 
54 PRODUCTION AND CONSUMPTION. 
 
 commodities, is generally conceded, but that it can exist 
 in every line of production at the same time, assuming 
 the form of a general over-supply, is pronounced im- 
 possible. But our law of quantitative relation between 
 production and future consumption imposes no such 
 qualification. As we deduced from it the possibility 
 of over-supply in one branch of production, we can 
 deduce with equal logical precision the possibility of a 
 simultaneous over-supply at every point, that is, of 
 general over-supply. Just as y. may at any one point 
 in the productive process be embodied in a larger 
 number of material forms of capital than is economi- 
 cally required, so it may be embodied at all points. 
 We are, then, here entitled to affirm the theoretic 
 possibility of general over-supply. 
 
 If there should exist at any time a larger number of 
 forms of capital at any point or points in the process 
 of production than is economically required for the 
 current rate of consumption, this excess will figure as 
 over-supply. But suppose that every increase in pro- 
 duction, or every temporary or slight excess in these 
 forms of capital, has power to force a corresponding 
 increase of consumption, it is clear that this general 
 over-supply can only exist as such for a merely 
 nominal length of time, and that, when it has produced 
 its effect by increasing consumption, it will figure as 
 real capital with a full economic use. 
 
 In the next chapter we shall examine the actual 
 phenomena of trade, and, instead of replying to this 
 question by purely theoretic reasoning, we shall base 
 our answer on admitted commercial facts. 
 
 In this chapter it has been shown that an exact 
 quantitative relation must exist between the amount of 
 
PRODUCTION AND CONSUMPTION. 55 
 
 useful capital and the rate of consumption. In 
 Chapter IV. it will be shown that, in any period of 
 depression in trade, the rate of consumption actually 
 determines the amount of useful capital, and that, 
 in such periods, only by first increasing the demand 
 for commodities is it possible to increase the amount 
 of real capital in the community. 
 
56 THE PHYSIOLOGY OF PRODUCTION. 
 
 CHAPTEE III. 
 
 THE PHYSIOLOGY OF PRODUCTION. 
 
 FEW terms have caused more trouble in economics 
 than supply and demand. It is necessary, therefore, 
 to clearly emphasise the meanings which are given 
 to them in this book. Taken in relation to an 
 act of sale, they bear a different meaning according 
 as they are regarded from the point of view of an 
 individual or group of individuals and from that of 
 the whole community. From the point of view of 
 the individual member of a commercial community, 
 every sale of any kind of goods is a quantity sup- 
 plied and every purchase a quantity demanded. 
 Thus, if a farmer goes to market with a quantity of 
 wheat and sells it to a merchant, so far as the farmer 
 is concerned the wheat has been demanded. If, how- 
 ever, the merchant still offers this same wheat for 
 sale at the same market, it is evident that the quantity 
 of wheat offered at the market has not been affected. 
 The same aggregate of wheat is still offered, the only 
 difference being that the ownership of a part of it 
 has been transferred from the farmer to the merchant. 
 
THE PHYSIOLOGY OF PRODUCTION. 57 
 
 If, however, a miller purchases this wheat, it is with- 
 drawn from the market, and no longer forms a part 
 of the stock there offered ; it has, so far as the market 
 is concerned, been demanded and supplied. But when 
 the community is considered as a whole, it is evident 
 that this wheat is still offered for sale by the miller 
 in the form of flour; in its new shape, with added 
 value, it still constitutes a part of the general stock, 
 and has not, so far as the community is concerned, 
 been demanded and supplied. The community in- 
 cludes the farmer, the merchant, the miller, and the 
 baker ; and if the wheat is a part of the general stock 
 when in the hands of the farmer, it must equally be 
 so when in the hands of the merchant, the miller, or 
 the baker. So soon, however, as the bread is bought 
 by a consumer and consumed, the aggregate stock is 
 affected ; it is reduced by the exact total of such a 
 purchase. The stock possessed by the community is 
 decreased, so that as regards the whole community 
 the wheat, in its final form of bread, has been de- 
 manded. 
 
 If, therefore, by the 'quantity demanded' be meant 
 the quantity withdrawn from the general stock, 
 demand can only mean that demand exercised by 
 consumers, and does not include the inter-purchases 
 and sales effected by the various classes of producers. 
 It is necessary to insist upon this strict distinction. 
 Wheat is habitually sold by one dealer to another, 
 and passes through the hands of the miller and the 
 baker before it is consumed in the form of loaves. 
 If it were to count as supply on each occasion of its 
 sale, and were said to be supplied and demanded 
 each time, each bushel would reckon as a supply of 
 
58 THE PHYSIOLOGY OF PRODUCTION. 
 
 as many bushels as the number of times it had been 
 sold. The aggregate supply of wheat could thus 
 be indefinitely increased by interposing additional 
 ' middlemen ' between the farmer and the baker, a 
 conclusion which is absurd. 
 
 Thus, while from the point of view of an individual, 
 or a class of individuals, the quantity of wealth 
 bought or sold by such individuals or classes of 
 individuals may be considered to be supplied and 
 demanded, from the point of view of the community 
 only those commodities which are bought by con- 
 sumers can be said to be supplied or demanded. 
 Since political economy is concerned primarily with 
 the interests, not of private individuals, but of the 
 whole community, the definition of such terms as 
 supply and demand when used without qualification 
 must evidently be made to accord with the larger 
 point of view. Supply can now be defined with- 
 out ambiguity as 'the aggregate of all goods 
 (shop-goods) available for sale to consumers.' 
 Demand is an ambiguous term, and it will be 
 well to define separately 'quantity demanded' and 
 ' demand,' in order that the latter may have only one 
 meaning. ' Quantity demanded ' is ' the aggregate of 
 all shop-goods l bought by consumers.' ' Demand ' * 
 is ' the quantity of purchasing power ' applied to pur- 
 chase the ' quantity demanded.' 
 
 1 Siiice. when shop-goods have been bought they are commodities, it 
 would be more accurate to use the term commodity here, but to do 
 so would introduce a possible misunderstanding as regards the rela- 
 tions of ' supply ' and ' quantity demanded.' 
 
 2 ' Demand ' is more than ambiguous as a term in political 
 economy. It seems to be used in at least four senses : 
 
 1. As the equivalent of 'quantity demanded.' 
 
THE PHYSIOLOGY OF PRODUCTION. 59 
 
 But while political economy deals primarily with 
 the production and consumption of wealth by the 
 whole community, it is also necessary to examine 
 the relation in which individuals and groups of indi- 
 viduals stand to one another ; that is to say, to treat 
 wealth from the point of view of narrower interests 
 than that of the whole community. The addition to 
 or abstraction from the wealth of an individual is, 
 from his point of view, analogous to the addition to 
 or abstraction from the total wealth of the com- 
 munity. We shall, therefore, be justified in using 
 the convenient terms, 'supply' and 'demand,' in 
 speaking of the purchases made from other producers 
 than retail shopkeepers. So we shall speak of the 
 supply of wheat and the demand for wheat, as well 
 as the supply of loaves and the demand for loaves, 
 although the exercise of a demand for wheat by the 
 miller does not diminish the stock of wealth of the 
 community , while a corresponding exercise of demand 
 for loaves by the consumer does this. If there existed 
 other convenient terms by which the two acts of 
 purchase might be rightly distinguished, it would 
 doubtless be less embarrassing; but since there are 
 no other terms to describe the stock of incomplete 
 commodities and the amount of purchasing power 
 which is used to purchase them than supply and 
 demand, we are compelled to apply these terms. 
 
 2. As purchasing power in general, whether actually applied to 
 
 purchase shop-goods or not. 
 
 3. Purchasing power applied to purchase shop-goods (the definition 
 
 here accepted). 
 
 4. The desire to obtain various forms of wealth, a conception 
 
 which removes it out of all possible relation with supply as a 
 quantity offered. 
 
60 THE PHYSIOLOGY OF PRODUCTION. 
 
 It must, however, be understood that when the 
 terms are used without previous qualification they 
 apply to the purchase of shop-goods or finished pro- 
 ducts. 
 
 It has already been seen that the only act of pur- 
 chase or exercise of purchasing power which dimi- 
 nishes the stock of wealth of the community is 
 the demand for shop-goods or finished products. 
 Now, what is this purchasing power? The most 
 convenient form of purchasing power is, of course, 
 money ; but every form of wealth contains a 
 specialised form of this power, which can be 
 exchanged for the general form of money. To 
 the maker and the trader goods, raw material, 
 plant, &c., are valued exclusively for the more 
 or less of this purchasing power which they afford 
 their owners. The owner is indifferent whether 
 this purchasing power is embodied in the shape of 
 otto of roses or guano, a steam-engine or a travelling 
 panorama ; the one point he considers is the market 
 value, the purchasing power which such possessions 
 give. From the point of view of the individual 
 tradesman, all acts of sale and purchase are primarily 
 exchanges of forms of this purchasing power. When 
 a baker sells bread for money he exchanges pur- 
 chasing power in the shape of bread for purchasing 
 power in the shape of money, and when he buys 
 flour from the miller he exchanges purchasing power 
 in the shape of money for purchasing power in the 
 shape of flour. The baker considers himself equally 
 rich; indeed, considers himself to possess just as 
 much 'money/ whether he possesses one thousand 
 sovereigns or a stock of flour which, at current prices, 
 
THE PHYSIOLOGY OF PRODUCTION. 61 
 
 is worth . 1,000. Again, from the point of view ot 
 the whole community, it will be evident that the 
 aggregate amount of purchasing power possessed by 
 the community is in no wise affected by sales and 
 purchases of unfinished goods, of raw material, or of 
 plant. In such acts of trade each individual retains 
 a constant amount of purchasing power, and merely 
 changes the shape in which he holds it. 
 
 So soon, however, as the consumer buys shop- 
 goods or finished products the case is different. In this 
 act a quantity of purchasing power is annihilated and 
 ceases to exist. Take the case of the man who pur- 
 chases a loaf for his consumption, paying 6 d. to the 
 baker. It is true the baker has merely exchanged 
 one form of purchasing power, a loaf, for another 
 form, 6 d., but the consumer, who previously had 
 6 d., has now nothing, for that which he got in ex- 
 change he has consumed. Thus, we have identified 
 the act of demand for a commodity with the extinc- 
 tion of purchasing power and the consumption of a 
 portion of the total stock of wealth of the com- 
 munity. 
 
 The next step is to establish clearly the following 
 propositions : Firstly, that an exercise of demand 
 (for commodities) cannot diminish capital ; secondly, 
 that an exercise of demand, though it consumes a 
 portion of previously existent wealth and annihilates 
 a portion of purchasing power, causes the production 
 of an equivalent amount of new forms of wealth and 
 purchasing power. 
 
 From what has been already said respecting purchas- 
 ing power it will be evident that the capital of an indi- 
 vidual shopkeeper cannot be diminished by the pur- 
 
62 THE PHYSIOLOGY OF PRODUCTION. 
 
 chases of his customers at current prices. For every 
 loaf a baker sells he receives money sufficient to buy 
 flour and make another loaf, together with an element 
 of profit which is not yet within our scope of inquiry. 
 Whether the baker does or does not apply this 
 money to replace the loaf he has sold, it cannot be 
 said that his capital is diminished by the act of pur- 
 chase. For capital is always reckoned in money 
 values without consideration as to what quantity of 
 it at any given time exists in the form of money, 
 goods, or plant. Let us assume that it is a grocer 
 with .2,000 of grocery stores; this ..2,000 forms 
 his capital, which he rigorously refuses to spend or 
 consume. In three months' time every form in which 
 this capital existed, every ounce of sugar, pound of 
 tea, or side of bacon, will have been consumed, and 
 may not even have been replaced in similar propor- 
 tions of quantity ; but in some shape or other, in new 
 forms of goods, or in money in the till or at his 
 bankers, this . 2,000 of capital will continue to exist. 
 This is the meaning of commercial capital, in using 
 which all merchants, statisticians, and political econo- 
 mists are in complete accord. So far as the capital of 
 individuals is concerned, we shall not, therefore, ask 
 for any other test than that of money estimate. 
 From the individual's point of view it is the money 
 value which he applies to the acquisition of an 
 income. Since, then, the purchase of shop-goods by a 
 consumer at current prices does not diminish the 
 capital of the retailer, so the purchases of a retailer 
 from a wholesale merchant, or of the latter from a 
 manufacturer, do not diminish for a moment the 
 capital which belongs to each respectively. Thus, it 
 
THE PHYSIOLOGY OF PRODUCTION. 63 
 
 will appear that the normal rate of demand can have 
 no effect in diminishing the stock of capital at any 
 point in the organisation of industry. It has already 
 been shown in the last chapter that no more capital 
 can economically exist at any point in the productive 
 process than is required to furnish commodities 
 for the current rate of consumption. Hence, it 
 is clear that a normal demand for commodities 
 keeps in continuous existence the same amount of 
 capital. 
 
 It now remains to establish the second point, that 
 a normal exercise of demand causes the production 
 of an amount of new forms of wealth equivalent to 
 those consumed ; that is to say, not only does capital 
 enjoy a continuous existence, but the number of forms 
 of each kind of capital exist continuously. It is 
 clear that every individual form of capital perishes : 
 if it is raw material or goods, it passes into the form 
 of commodity, and is thus consumed; if it is plant 
 or machinery, it is worn out by use or superseded 
 by newer and more efficient forms. Is there any 
 economic force which induces the production of fresh 
 forms of capital to take the place of those which 
 parish ? 
 
 When shop-goods are purchased by a consumer, the 
 price paid for them under normal conditions of trade 
 is sufficient to enable the shopkeeper to replace the 
 articles sold, and to yield him a margin of gain. 
 This 'margin of gain,' or 'retailer's profit,' as it is 
 sometimes loosely called, represents the whole dif- 
 ference between the wholesale and the retail price. 
 It furnishes a fund out of which is paid the profit of 
 the shopkeeper upon the capital in his business, his 
 
64 THE PHYSIOLOGY OF PRODUCTION. 
 
 own wages, the wages of his employes, and the rent 
 of his shop, &c. This 'margin of gain' provides, in 
 fact, the income received by all those who assist pro- 
 duction in the retail stage. But at this point in our 
 argument it is only necessary to recognise that out of 
 this margin of gain comes the element of personal 
 gain or profit which is the inducement to the shop- 
 keeper to ply his trade. The price received by the 
 shopkeeper is sufficient, then, to enable him to replace 
 the article he has sold and to retain a margin of 
 gain. 
 
 But is there any influence at work which compels 
 him to spend the money in replacing the article he 
 has sold rather than retain the purchasing power in 
 its shape of money or apply it to buy commodities 
 for his own consumption ? Yes, he is a tradesman, 
 and as such seeks an income which is made of the 
 profit on his sales, and in no other way. Thus, it is 
 his interest to maintain his stock of shop-goods intact, 
 so as to provide for expected sales. His capital is 
 just as great if, instead of using the money he has 
 received to purchase a similar article to that which 
 he has sold, he keeps the money in his till, but his 
 capital is not in the most advantageous form for the 
 conduct of his trade and the getting of future profit. 
 Hence, the shopkeeper is impelled by a force which 
 is not the less natural and insuperable because it 
 acts through the operation of his will, to continually 
 replace the goods he sells to consumers by applying 
 the price he receives (minus the margin of gain) 
 as a demand for like goods from the store of the 
 wholesale trader. The wholesale trader is impelled 
 by the same force to replenish his diminished store by 
 
THE PHYSIOLOGY OF PRODUCTION. 65 
 
 using the money he receives from the shopkeeper 
 (again, minus his margin of gain) in purchasing a like 
 quantity of articles from the manufacturer. And so 
 the impulse passes along the whole line of produc- 
 tion, compelling each producer to replace the form of 
 goods which he has passed on to a further stage in 
 production by using the money he has received for 
 it to replace it by a similar form of goods. It will 
 presently appear that he is compelled out of reason- 
 able consideration for his own interest not only to keep 
 the same number of forms of goods to meet the 
 expected continuance of the present rate of sales, 
 but also to replace every form of plant or machinery 
 which is worn out in the course of production. To 
 make this position clear let us take the production of 
 some one commodity, say pianos. If we suppose 
 the quantity of pianos demanded to be a regular one, 
 we shall be justified in concluding that at any given 
 time there will be a number of pianos in more and 
 less finished states from the condition of raw material 
 (wood, iron, &c.) to the condition of finished shop- 
 goods, and that there will be a fixed relation between 
 the amount of these piano-goods at the various 
 stages of development. Now, if I go into a piano- 
 shop and purchase a piano, the shopkeeper, seeking 
 the profit which comes by selling pianos, will use the 
 money I pay him to obtain another piano from the 
 wholesale merchant so as to maintain his full stock ; 
 the merchant will use the money he receives to pur- 
 chase another piano from the manufacturer, and so 
 on. Thus, the money I pay the shopkeeper for a 
 piano will be handed down along the whole line of 
 
 c 
 
66 THE PHYSIOLOGY OF PRODUCTION. 
 
 production, each recipient abstracting a portion which 
 shall serve as profit to himself, as wages to his 
 labourers/ as a fund to repair the wear-and-tear of 
 machinery and plant, and as rent for natural agents 
 whose use he enjoys. The effect of this transmission 
 of money along the w r hole line will be to move a 
 portion of piano-material at each stage one further 
 step, so as to fill the vacancy occasioned by my 
 demand. 
 
 Since, further, my demand forms merely a portion of 
 the ordinary current demand, it will have been expected 
 and provided for all along the line. Thus, the shop- 
 keeper, anticipating that he will on that day sell a 
 piano, has ordered from the merchant a new piano to 
 replace it. The merchant, anticipating this and 
 other shopkeepers' orders, has ordered new pianos 
 to replace them from the maker, and the maker, 
 anticipating these orders, has engaged labour and pro- 
 vided the raw material requisite to execute them. 
 Every individual engaged in the trade expects to sell 
 every day a certain quantity of goods, and makes 
 the necessary arrangements for supplying them. If 
 the shopkeeper sells three pianos daily, on the 
 average, he will order from the merchant three pianos 
 daily, or say eighteen pianos a-week, and similarly 
 with the merchant and manufacturer, so that each 
 of these successive purchases do not reduce the 
 stock of any of the traders in the line, but merely 
 cause a general advance of piano-material, a shop- 
 
 1 The term ' labourer ' is used here to cover all those producers who 
 receive wages from capitalists. 
 
THE PHYSIOLOGY OF PRODUCTION. 
 
 67 
 
 goods piano passing into commodity, and new raw 
 material being created, thus : 
 
 Previous to purchase. 
 
 R.M. 
 R. M. 1 
 R. M.* 
 R. M. 3 
 G. . , 
 S.G. , 
 
 After purchase. 
 
 R. M. Newly created. 
 
 R.M. 1 
 R.M. 2 
 -R. M. 3 
 G. 
 
 S.G. 
 Commodity. 
 
 Thus the condition of piano material after my pur- 
 chase will be precisely the same as before my purchase. 
 Thus a continuity in the forms of piano goods is 
 secured automatically by the natural result of an act 
 of purchase of a shop good. Since the moving on of 
 piano material at the various stages in production 
 requires and employs a certain amount of forms of 
 machinery and labour, in so far as this work of move- 
 ment wears out the forms of machinery, it must set 
 in operation a force which shall bring about the con- 
 stant replenishment of these forms if the continuous 
 demand for pianos is to be satisfied. As we saw that 
 the piano seller was impelled by his own interest to 
 employ the bulk of the price paid for a piano in 
 purchasing another piano from the wholesale merchant, 
 by the same consideration he is compelled to use 
 another fraction of the price in maintaining his shop 
 and premises in good repair, in advertising, and in 
 otherwise maintaining his business in proper condition. 
 So, also, the merchant is compelled to use a portion 
 of the price he receives in keeping his warehouses in 
 
68 THE PHYSIOLOGY OF PRODUCTION. 
 
 good repair. In the case of traders, this element of 
 price which is spent in repairs of plant and machinery 
 is often slight, but when we come to the makers it is 
 more important. In order to get his usual rate of 
 profit by maintaining his rate of sales, the maker 
 must keep his machinery in good repair, and just as 
 his interest impels him to replace goods he has sold, so 
 it impels him to use a portion of the price he receives 
 to repair machinery worn out in use. Thus a part of 
 the price which comes to the piano manufacturer out 
 of the price I paid for my piano must go to the makers 
 or traders of new machinery, which is constantly 
 required to replace worn-out machinery. As we con- 
 ceived that there were pianos in every stage of 
 development, so we must conceive that the machinery 
 required in making pianos exists in every stage of 
 development. So that as my purchase of a piano 
 preserved the continuity of the forms of capital con- 
 sisting of piano material in its various stages, so it will 
 preserve the continuity of the forms of capital consist- 
 ing in machinery and plant required to assist in 
 forwarding piano production at the different points, 
 by moving on the more or less finished forms of 
 machinery towards the condition of completed 
 machines, so as to satisfy the constant requirements. 1 
 
 1 It is, of course, not strictly true that the same amount of produc- 
 tion always requires the same amount of forms of machinery to assist. 
 New inventions and improvements in the arts constantly vary 
 the number of forms of machinery required to do any given total of 
 work. But, in dealing with the broad general results of demand 
 for commodities, it is necessary to assume a stable condition of the 
 arts, just as we assume a stable condition of demand. 
 
THE PHYSIOLOGY OF PRODUCTION. 
 
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70 THE PHYSIOLOGY OF PRODUCTION. 
 
 It will be evident from the previous argument that 
 my demand for a piano to pass from the last stage in 
 production, viz., shop goods into commodity, sets in 
 operation a force which acts not only at every point, 
 along the direct line from R. M. to Com., but at every 
 point in each of the perpendicular lines, impelling the 
 raw material of machinery to advance one step to- 
 wards finished machinery. It is needless to remark 
 that the effect of my exercise of demand on the per- 
 pendicular lines is extremely slight as compared with 
 the effect on the straight line of production, inas- 
 much as the wear and tear of machinery in assisting 
 to produce one piano would be extremely small, but, 
 for all that, the effort should not be overlooked. The 
 regular demand for pianos keeps in continuous exist- 
 ence an equal number of forms of piano material at 
 various stages, and an equal number of forms of plant 
 and machinery. We have taken here the instance of 
 the piano trade, but what holds there holds of trade in 
 general. If we neglect the specific piano element in 
 the above illustration, and read it to indicate the whole 
 mechanism of commerce which is concerned in pro- 
 moting the production of utilities and conveniences, 
 we shall see that demand for commodities gives con- 
 tinuity and employment to the whole machine. 
 
 Thus we see that not only does the exercise of 
 demand for commodities fail to diminish the real 
 capital stationed at the various stages in production, 
 but that it keeps in continuous existence the same 
 quantity of capital in the various shapes necessary. 
 
 Each individual form of capital perishes, but only 
 on condition that the spirit which has animated it 
 pass into another form, which performs a service 
 
THE PHYSIOLOGY OF PRODUCTION. 71 
 
 like unto the former one. This continuity of capital 
 is analogous to the continuity of a community ; each 
 individual dies in his turn, but the community is the 
 same ; each individual continually grows older, but the 
 average age of the individual in the community 
 remains the same, and there are always the same 
 proportion of individuals at any given age. Or the 
 individual forms of capital may be likened to drops of 
 water in a river ; each in turn passes down the course 
 and is lost in the ocean, but the river never grows less, 
 its continuity is never lost. 
 
 Thus far the argument has brought us to two 
 important conclusions. First, that in a condition 
 of steady consumption the continuous existence of 
 capital, and of the same number of forms of capital, 
 is maintained by a force which owes its impetus 
 to a constant demand for commodities. Second, 
 that the profits which form the money incomes of 
 all capitalists concerned in production, the wages of 
 all the labourers concerned, and the rent of all the 
 natural agents required, are, in a regular condition 
 of commerce, paid out of the prices paid by con- 
 sumers, that is, out of retail prices. 
 
 Before we pass from investigating the results of a 
 normal rate of demand for commodities to an exami- 
 nation of the effects of a growing rate of demand, it 
 will be well to draw attention to one or two conclu- 
 sions which may be regarded as corollaries of the 
 argument above. 
 
 (A.) It has been often asserted that labourers are 
 maintained out of capital; that they eat, drink, and 
 wear capital, replacing its value by productive 
 labour. 
 
72 THE PHYSIOLOGY OF PRODUCTION. 
 
 Since the definition of capital here accepted ex- 
 cludes all commodities, it will be obvious that the 
 food, clothing, &c., enjoyed by labourers is no part 
 of the capital of the community. 
 
 But since it still appears to be held by some eco- 
 nomists that an individual capitalist owns a ' susten- 
 tation fund,' which to all intents consists of food, 
 clothing, shelter, and that he provides labourers with 
 these desirable things while they are labouring, it 
 may be well to state distinctly the facts. Labourers 
 do not receive wages until they have embodied the 
 value of their wages in new products. But if the 
 capitalist obtains a new value of . i before he parts 
 with . i in the form of wages, it is evident that the 
 . i paid to his labourer is no part of the capitalist's 
 capital. At the beginning of the week, if the capital- 
 ist possessed this sovereign, it will rightly have been 
 regarded as a portion of his capital. But his capital, 
 so far as it was embodied in the sovereign, has now 
 moved out of that embodiment into something 
 wholly or partly produced by his labourer. Thus, 
 if a capitalist possesses . 100, and buys labour, at the 
 end of the week he possesses the value produced by 
 the labour ; his capital is now embodied in this 
 newly produced value, and no part of his capital is 
 paid to the labourers when he pays them the . 100. 
 The labourers have produced . 100 value, and 
 receive . i oo in exchange ; the capitalist still retains 
 his . 100 capital, though in an altered shape. 
 
 If there is in no case an advance of wages on the 
 part of the capitalist, and if the act of paying wages 
 is an act of exchange by which the capitalist becomes 
 possessed of certain value created by the labourer, 
 
THE PHYSIOLOGY OF PRODUCTION. 73 
 
 for which he pays an agreed price (wages), whence 
 comes the notion of a sustentation fund ? The 
 answer would appear to be this : a capitalist, to con- 
 duct his business successfully, must have his capital 
 stored in different shapes. Part of it is in the shape 
 of machinery and other plant, part of it in the shape 
 of raw material, and raw material in each and every 
 stage in which it is his business to deal with 
 it. Now, when he starts in business, he will pur- 
 chase his machinery and plant and his raw material ; 
 but, as he does not yet possess raw material in every 
 stage up to goods, his capital is not complete. To 
 supply himself with these further forms of capital, he 
 has to purchase labour to advance raw material till 
 he possesses it in every stage. For some weeks, 
 therefore, he must have a fund of money out of 
 which he can continuously purchase the labour neces- 
 sary to advance his raw material to the various stages 
 necessary to make his capital complete. These 
 labourers at first sight appear to be subsisted out of a 
 sustentation fund possessed by the capitalist, and this j 
 idea has been seized on by some economists and ela- \ 
 borated into a sort of incipient wages-fund theory ; it 
 is, however, evident that this is wholly unjustifiable. 
 The capitalist possesses certain capital, money (or we 
 may say certain capital, food, and necessaries of 
 labourers), and this form, or these forms, of capital he 
 wishes to exchange for forms suitable to the conduct 
 of his business ; he, therefore, agrees to exchange 
 them with labourers for the labour requisite to con- 
 vert his raw material into a line of raw material in 
 every stage of production up to the goods he sells. 
 So soon as his capital is complete his weekly sales of 
 
74 THE PHYSIOLOGY OF PRODUCTION. 
 
 goods provide him with the money requisite to pay 
 his labourers' weekly wages, his rent, and his own 
 profit. All, therefore, that the capitalist possesses is 
 the capital requisite to carry on his business ; no funds 
 of any sort are set apart as a sustentation fund. 
 
 But it will, perhaps, be objected that there is an 
 ^element of risk in all production ; the result may 
 turn out to have no market value, or the forms in which 
 the labour is stored may be accidentally destroyed; 
 these risks, it will, perhaps, be said, are undertaken by 
 the capitalist, and involve the necessity of his possess- 
 ing a sustentation fund, out of which his labourers' 
 wages may at such periods be paid. But on exami- 
 nation this contention is seen to be equally baseless 
 with that already examined. The capitalist in each 
 of these cases has purchased from the labourers a 
 certain total of labour, and pays in money for this 
 labour. If the capitalist has directed the labourers to 
 embody their labour in useless forms, or if, though 
 embodied in useful forms, he does not guard against 
 their accidental destruction, he has in either case lost 
 a portion of his capital. The capital has not been 
 given to, and consumed by, the labourers, but the par- 
 ticular forms in which it exists have, in the first 
 case, no market value, and in the other have been 
 destroyed. The labourers sold a certain specific 
 total of labour for a certain specific price, and the 
 purchase and payment is exactly equivalent to the 
 purchase and payment for the use of land or capital. 
 Though individuals may, and frequently do, lose 
 'money' by hiring a farm, no one suggests that a 
 landowner is subsisted out of a sustentation fund, and 
 because individuals may similarly lose money by 
 
THE PHYSIOLOGY OF PRODUCTION. 75 
 
 hiring labourers, it is equally absurd to suggest that 
 this proves them to be subsisted out of a sustentation 
 fund. 
 
 But it will, perhaps, be suggested that, as sales of 
 goods are more or less irregular, the capitalist must 
 possess a sustentation fund, out of which to pay his 
 labourers' wages at any period when the sale of his 
 goods- temporarily ceases. Though the arguments 
 we have used really answer this objection, it is as 
 well to glance briefly at it. What has really hap- 
 pened in this case is, that the capitalist has put part 
 of his capital into temporarily useless forms. To 
 conduct his business he must, therefore, be provided 
 with certain additional capital. Thus, if we assume 
 he requires . 20,000 of forms of capital to conduct 
 his business, but, owing to lack of foresight, occa- 
 sionally gets . 5,000 into temporarily useless forms, 
 then he must have . 25,000 forms of capital in all. 
 Did he possess perfect foresight he would never 
 purchase any labour other than that requisite to 
 enable him to just finish the production of the arti- 
 cles he sells at the exact moment when they are 
 sold, and in this case he would only require . 20,000 
 of forms of capital. Owing to the fact that capi- 
 talists possess varying degrees of foresight, the quan- 
 tity of capital required by them for the due conduct 
 of any business varies ; but this does not afford any 
 grounds for resuscitating any part of the wages fund 
 doctrine under a new name, but merely shows that 
 more capital is actually requisite than would be the 
 case if capitalists were endowed with perfect foresight. 
 
 The fact of certain additional capital being requisite 
 may, perhaps, suggest that this capital is of the 
 
76 THE PHYSIOLOGY OF PRODUCTION. 
 
 nature of a ' risk fund/ but, if so, the ' risk fund ' is not 
 paid away to the labourers as wages. The capitalist 
 still possesses his risk fund intact ; true, he has 
 directed his labourers to embody it in a temporarily 
 useless form, but none the less it is as wholly and 
 absolutely his as before the purchase of the labour. 
 This being the case it is obvious that no fraction of 
 this ' risk fund ' has been paid away to the labourers. 
 
 We may conclude, therefore, that labourers are 
 paid out of the value they assist in producing. Their 
 wages are their share of this value, and their wages 
 are no more advanced from any special fund than the 
 landlord's rent or the capitalist's profit. 1 It is, of 
 course, evident that ' sustentation fund ' may be de- 
 fined so as to cover the whole fund which is divisible 
 as income among the members of the community. 
 If so defined, we have no objection to it; it is only 
 when used to differentiate the source of labourers' 
 incomes from the source of the incomes of other 
 members of the community, and to embody part or 
 all of the wages fund doctrine, that it is necessary to 
 object to it. 
 
 (B.) Capital is not consumed in the wear and tear 
 of machinery, but constantly passes out of disused or 
 worn-out forms into new forms. 
 
 Karl Marx has argued that machinery is worked 
 up into the products it helps to produce, and is thus 
 consumed in the commodities. He wishes to main- 
 tain the claim of living present labour to be the sole 
 productive agent ; hence he maintains that the only 
 service done by machinery consists in the value it 
 
 1 For the similar conclusion of Marx, see his " Capital," Part V1L. 
 
 ch. xxm. 
 
THE PHYSIOLOGY OF PRODUCTION. 77 
 
 adds to raw materials by being worked up in con- 
 junction with it to form commodities. Thus the 
 reward paid to a machinery owner ought not to 
 exceed the total cost of production of the machine. 
 In reply to this we may briefly urge : 
 
 1. That it is not literally true that the material 
 
 of the machine passes into the commodity. 
 
 2. That if the statement is to be understood 
 
 metaphorically, it is equally true of the 
 labourer. He is used up to make commo- 
 dities, and the sum of wages received during 
 his life should, in accordance with Marx's 
 argument, not exceed his cost of produc- 
 tion. This last element in a slave commu- 
 nity would be easily ascertained. 
 
 3. It has been shown that the real capital, either 
 
 from the point of view of the community or 
 of the individual capitalist, is not for one 
 moment diminished by the constant process 
 of wear and tear. His capital is not worked 
 up into anything, but remains intact and 
 embodied in the same number of various 
 forms all the time. 
 
 While the community is unable to consume its 
 capital, to consume its fields, railways, factories, 
 steam-engines, shops, and iron foundries, to eat its 
 growing corn, or wear its unspun cotton and unwoven 
 wool, the individual suffers from no such disability. 
 He can convert his fields or houses, his ironworks 
 or growing crops, into champagne and truffles with 
 the utmost facility. To explain the apparent paradox, 
 that any individual can accomplish what the aggre- 
 gate of all individuals cannot accomplish, it is only 
 
78 THE PHYSIOLOGY OF PRODUCTION. 
 
 necessary to consider what the aggregate consumable 
 income of the community actually is. This consum- 
 able income is the annual output of l subsistence, 
 conveniences, and amusements ; ' this is the sum total 
 of what the community actually receives in exchange 
 for its various efforts and labours. The individual's 
 income is the particular share of this total to which 
 such individual is, under the present social arrange- 
 ments, entitled. Thus, the aggregate of all individuals' 
 incomes exactly equals the community's income. 
 Now, since the community, as a whole, can never 
 consume more ' subsistence, conveniences, and amuse- 
 ments ' than it has actually produced, it is obvious 
 that the community 1 can never live beyond its 
 income. If, therefore, any given individual wishes to 
 live beyond his income, he can only do so provided 
 that some other individual or individuals will consent 
 to consume as much less of their income or incomes 
 as he wishes to consume more, and will hand over to 
 him this excess in exchange for the machinery or raw 
 material which he possesses. , Thus the extravagant 
 individual consumes his neighbours' incomes, whilst 
 these thrifty neighbours become possessed of the 
 capital which he previously owned. Therefore, 
 although it is usual to speak of an individual as con- 
 suming or living upon his capital, it is evident that 
 this is, so far as the community is concerned, not 
 accurate. No capital is destroyed ; all that happens 
 is that certain capital which previously belonged to 
 A. has been transferred to B., and certain income 
 
 1 It may here be well to remind the reader again that community 
 means the whole industrial public. A nation, as an individual, may 
 live beyond its income for a time. 
 
THE PHYSIOLOGY OF PRODUCTION. 79 
 
 accumulated by B. as savings has been transferred to 
 A. and consumed by him. 
 
 Having thus seen that in no case can the com- 
 munity's capital be demanded and consumed, we have 
 next to ascertain what is meant by the common term 
 ' demand for capital.' When A. offers at the end of 
 the year to repay to B. . 105 for every . 100 B. now 
 lends A., he is said to demand capital. It is, how- 
 ever, obvious that this term is incorrectly applied. 
 A. does not obtain any part of B.'s capital; all that 
 he gets is the use of .100 of it for one year. 
 Similarly, A. does not give B. . 105 ; for of this sum 
 . 100 is, and always has been, B.'s ; all he gives B. 
 is $ What really has happened is, therefore, that 
 A. obtains the use of B.'s . 100 for one year, and 
 pays for this use .$. Now this .$ is called inte- 
 rest ; interest, therefore, is payment for the use of 
 money. 
 
 Similarly, when A. hires a cotton factory from B. r 
 and agrees not merely to maintain it in good repair, 
 to replace all worn-out machinery by new, &c., but,, 
 in addition, to give B. . 500 a-year, this . 500 is 
 paid for the use of B.'s capital. B. never parts with 
 the ownership of any part or fraction of his factory ; 
 all that A. gets is the use of it, and for this use he 
 pays B. . 500. If, in addition, A. borrows the raw 
 material and other funds requisite to enable him to 
 work the factory, and promises to return all those 
 funds to B. at the end of the year, together with a 
 sum of . 500, then it is obvious that this . 500 is 
 paid to B. as the price of the use of B.'s capital. 
 These prices are demand for the use of capital, and 
 in commercial language are known as interest, profit. 
 
80 THE PHYSIOLOGY OF PRODUCTION. 
 
 or rent ; the first of these terms being applied to the 
 demand for the use of money, the second to the 
 demand for the use of raw material, goods, &c., and 
 the third to the demand for the use of factories, ware- 
 houses, stores, houses, &c. ; in fact, to all forms of 
 capital with which any portion of natural agents are 
 inseparably connected. We need not, however, 
 trouble ourselves with any elaborate discussion of the 
 propriety of these terms. All we have to insist on 
 is the central fact, that each and all of these funds 
 are paid for the use either of capital or of natural 
 agents ; that they are the demand for the use of 
 capital or natural agents. 
 
 Returning now to the main purport of our argu- 
 ment, we have next to examine the effect of an 
 increasing demand for commodities in its relation to 
 a fixed supply. The generally accepted economic 
 law of market price is this : ' That when the demand 
 for an article tends to exceed the supply, the price 
 rises ; when the supply tends to exceed the demand, 
 the price falls.' To this statement of the law there 
 are two objections. First, a tendency towards such 
 excess could have no result ; no producer will put up 
 his price until he actually has, or believes that he 
 will shortly have, more bids at current prices than he 
 can supply. Secondly, the use of the word ' demand ' 
 here is particularly ambiguous, as it seems to denote 
 either the amount of desire to possess on the part 
 of consumers, or the quantity of money which they 
 would pay at present prices to satisfy this desire. 
 
 Now, there is no common measure by which desire 
 may be related to the quantity of supply, so that the 
 first meaning of ' demand ' will not be of any service. 
 
THE PHYSIOLOGY OF PRODUCTION. 81 
 
 On the other hand, to say that price varies as the 
 quantity of money offered varies in relation to a fixed 
 supply, is no law of price, but merely an expansion of 
 the statement that ' price varies.' The true relation 
 involved in the law of price is between quantity 
 demanded and quantity offered, i.e., supply, and the 
 exact statement of the law is as follows : ' When the 
 quantity demanded in the present exceeds the quantity 
 demanded in the past, in relation to a fixed supply, 
 prices rise ; when the quantity demanded in the pre- 
 sent falls below that demanded in the past, prices fall.' 
 This is the simplest statement of the mode of price 
 change. Whatever economic causes, such as increase 
 or decrease in cost of production, affect prices, will be 
 found to operate through the medium of changes in 
 the relation of quantity demanded and supply. 
 
 It is indeed obvious that so long as sellers can sell 
 everything they wish to sell at the current price, 
 they will resolutely refuse to take less than this price ; 
 so long, therefore, as the quantity demanded does 
 not decrease relatively to supply, the price cannot 
 fall. It is equally obvious that if sellers cannot clear 
 everything they wish to sell at the current price, they 
 will sooner or later consent to accept less than this . 
 price rather than continue to accumulate an unsold 
 surplus ; so soon, therefore, as the quantity demanded 
 decreases relatively to supply, prices will fall. 
 
 Similarly, if sellers find that they could sell more 
 than they have to offer at the current price, they 
 will raise their prices. The seller wishes to get the 
 highest price possible consistent with selling all the 
 goods he has to offer, and he will only cease raising 
 his prices when he finds he can only just effect this 
 
 C 2 
 
82 THE PHYSIOLOGY OF PRODUCTION. 
 
 object. So soon, therefore, as the quantity demanded 
 increases relatively to supply, the price must rise. 
 
 It will doubtless be urged that we are here taking 
 merely a superficial and altogether too simple a view 
 of price. Instead of asking the immediate cause of a 
 rise or fall, we should seek its ultimate cause, and 
 wander back into the mazes and mysteries of normal 
 price, cost of production, and the various other abstrac- 
 tions which have proved a veritable Serbonian bog to 
 adventurous economists. But our particular object in 
 reaching a law of price does not require an exploration 
 of these remote and doubtful regions ; it is sufficient 
 for us to know that if the price of any article falls, 
 this fall demonstrates that the quantity of such articles 
 demanded has decreased relatively to the quantity 
 offered for sale. If it be admitted that any producer 
 who can sell all he has to offer at the current price, 
 will absolutely refuse to take less than this price, it 
 must also be admitted that if the price falls it demon- 
 strates that producers offer more such articles for sale 
 than purchasers will buy at the old price. Were it 
 not so, why should producers take less ? But if it be 
 so then a fall in price shows that supply has increased 
 relatively to quantity demanded. 1 
 
 We have next to consider what takes place when 
 any community increases its rate of consumption, as, 
 for instance, the United States is now doing. Does 
 this constantly increasing consumption .empty the 
 shops and warehouses, deplete the stocks in hands of 
 manufacturers, and sweep the flocks and herds from 
 the broad plains of the far West ? The answer is 
 
 1 The arguments of the currency school of Economists are dealt 
 with in Ch. VII. 
 
THE PHYSIOLOGY OF PRODUCTION. 83 
 
 known to the world, it does none of these things ; 
 the growth in consumption is accompanied by a 
 corresponding growth in retail and wholesale stocks, 
 in raw material undergoing the processes of manufac- 
 ture, and by an equal or more than equal increase in 
 the flocks and herds, in the land under cultivation, 
 and in all the plant and machinery of manufacture, of 
 transport, of storage and retailing. Whilst, however, 
 these broad facts are matters of general knowledge, 
 and have been quantitatively related to each other in 
 Chapter II., it is desirable to ascertain the link which 
 in actual commerce connects these two phenomena 
 (increasing consumption and increasing capital). This 
 link is to be found in price. 
 
 Before a consumer can consume any article he 
 must buy it, and the price which he pays must always 
 on the average suffice 
 
 a. To enable the retailer to purchase a new and in 
 
 all respects equivalent article from the manu- 
 facturer. 
 
 b. To pay all the expenses incidental to the storage 
 
 and sale, and, in addition, to yield him such a 
 profit as will induce him to keep a sufficient 
 stock of such articles to enable consumers to 
 effect their purchases. 
 
 It is evident that no retailer would sell an article 
 in current demand unless the price he receives will 
 enable him to buy a new and equivalent article from 
 the makers. For instance, a hatter would not sell a 
 hat for ten shillings if he had at once to pay eleven 
 shillings to the maker for a new hat to replace the 
 one sold. In addition to this, it is evident that the 
 price he receives must repay his outlay on rent and 
 
84 THE PHYSIOLOGY OF PRODUCTION. 
 
 wages, and must also yield him a sufficient profit to 
 induce him to apply his capital and energies to the 
 trade. Did it not suffice for these purposes, the 
 retailers would not keep a stock, and if they did not 
 keep a stock consumers could not buy and consume. 
 But if each purchase must always provide the 
 retailer with sufficient funds to replace the article 
 sold, and, in addition, repay all his expenses and leave 
 him a profit sufficient to induce him to keep the 
 requisite stock of such articles, no matter how vigo- 
 rously consumers may press their demands, they will 
 never deplete his stock. This stock is, we can see, 
 protected by the price he charges, and this price is 
 an effective guarantee that no undue consumption 
 should ever take place. This is no mere theoretical 
 conclusion ; it is a truism of commerce. The more 
 any retailer's trade increases, the larger will be the 
 stock he keeps. Instances are within everyone's 
 experience. The trade of a particular shop or locality 
 increases, and with every such increase comes an en- 
 largement of premises and an increase in the quantity 
 of stock offered for sale. 
 
 The argument which applies to retailers applies 
 equally to manufacturers ; taking the price received 
 by the manufacturer, that is to say, portion a of the 
 retail price, we find that this price is likewise divisible 
 into two parts, it must suffice 
 
 c. To enable the manufacturer to replace the raw 
 
 material of his trade ; 
 
 d. To pay all the expenses of manufacture (wages 
 
 and rent), and, in addition, yield the manufac- 
 turer such a profit as will induce him to apply 
 his capital and energies to the trade. 
 
THE PHYSIOLOGY OF PRODUCTION. 85 
 
 It is evident that no manufacturer will usually and 
 habitually sell an article in current demand for less 
 than it costs to produce. If at the present price of 
 cotton yarns, the present rates of wages and rent, 
 &c., it costs him one shilling to make a yard of 
 calico, he will not sell a yard of calico for ten pence. 
 But even if he could get one shilling a yard, he would 
 not consent to trade on these terms ; in addition to 
 this one shilling he must receive a profit that will 
 induce him to apply his capital and energies to the 
 trade. Now, so soon as he finds that he could obtain 
 this profit on a larger output of goods, he will seek 
 to borrow or otherwise obtain the use of the funds 
 requisite to enable him to enlarge his manufactory 
 and to increase the quantities of raw material under- 
 going manufacture. This increase in his manufac- 
 turing operations involves the purchase of new 
 machinery, &c., the erection of new buildings, 
 &c., and not impossibly the construction of new 
 means of communication (railways, ships, and the 
 like). Whilst the replacement of worn-out machinery 
 is a comparatively trifling matter, the creation of new 
 plant to supply an increase in consumption requires 
 no small proportion of the productive energies of a 
 community. The plant required to produce any 
 individual commodity by modern methods vastly 
 exceeds in value the individual commodity itself, and 
 we certainly do not over-estimate this difference if 
 we assume that an increase of ten per cent, in the 
 annual consumption of any community would require 
 an increase of fifty per cent, in the production of that 
 community during the year of increase. 
 
 If, for instance, the increase in consumption takes 
 the form of bread or meat, it will be necessary to 
 
THE PHYSIOLOGY OF PRODUCTION. 
 
 bring fresh land into cultivation, to fence and drain it, 
 make roads and bridges, build barns, stables, and 
 farmhouses, and to provide the means of transport, 
 &c., &c. It will further be necessary to build mills 
 for grinding the larger total of wheat, to construct 
 new bakehouses and additional shops for its baking 
 and distribution, and similarly with meat. The value 
 embodied in all these various classes of plant will 
 vastly exceed the value of a week's or even of a year's 
 output of the bread and meat they have assisted to 
 produce. So soon, however, as the new forms of 
 capital have been once created, a continuance of the 
 increased consumption would only require the cor- 
 responding ten per cent, increase in production. Thus, 
 if a community increases its consumption from 10 x 
 wealth to 1 1 x wealth a year, production must during 
 the year when this increase takes place exceed con- 
 sumption by 4 x wealth in order to accumulate the 
 additional forms of capital required ; that is to say, 
 production must during this year amount to 15 x 
 wealth. So soon, however, as consumption, having 
 reached 1 1 x wealth annually, no longer increases, a 
 production of 1 1 x wealth annually is alone required. 1 
 We thus see that the quantitative relation between 
 capital and consumption which we showed in Chap. II. 
 must exist, is maintained through the medium of price 
 and profit. 
 
 If it be objected that perhaps no capital may be 
 available to increase the powers of production at the 
 various stages, or that production is limited, not by 
 capital, but by the quantity of natural agents or of 
 
 1 Repairs of existing machinery and other forms of plant are paid 
 for out of the prices of the commodities they assist in producing, and 
 must be regarded as part of the production of those commodities. 
 
\B R ^>S V 
 
 or THE 
 
 UNIVERSITY } 
 
 THE PHYSIOLOGY OF PRODUCTION. 87 
 
 labour available for use, then we reply, no increase in 
 consumption is possible. Retailers being unable to 
 replace the articles sold will raise their prices until 
 the quantity demanded is brought into proper econo- 
 mic relation with supply. The fact that in such com- 
 munities as the United States consumption is rapidly 
 increasing simultaneously with an equally rapid in- 
 crease in its capital, demonstrates that the capital can 
 be accumulated. Our present inquiry is, therefore, 
 limited to ascertaining how the quantitative relation 
 between these two quantities (consumption and 
 capital) is maintained. We do not make the ridi- 
 culous assertion that consumption can always in- 
 crease, but merely that if it increases capital will of 
 necessity simultaneously increase. 
 
 The fact that a price is paid guarantees that the 
 consumption of the article purchased shall in no wise 
 deplete capital. It guarantees that in no case shall 
 consumption exceed the total that is economically 
 desirable. When, however, consumption is effected 
 without the payment of a price, as, for instance, by the 
 devastation of war, by the exactions of a conqueror 
 or a tyrant, then these guarantees are lacking, and 
 consumption may and probably will deplete capital.' 
 
 We might carry on this analysis of trade till we 
 reached the producers of the raw material, and we 
 should then find that the whole of the price received 
 by them was divisible as rent, wages, and profit or 
 interest, but the argument is so simple and obvious 
 that no advantage would be gained by so doing. 
 
 Similarly, when we consider a decreasing consump- 
 tion, it is evident that as the retailers' sales decrease, 
 their profits decrease, and with every such decrease 
 the inducement to keep stock decreases. Thus, when 
 
88 THE PHYSIOLOGY OF PRODUCTION. 
 
 we find a shop or town suffering from a rapid decline 
 of trade, this decline does not cause an accumulation 
 of stock, but, on the contrary, the stock offered for 
 sale decreases more or less in proportion. 
 
 The same holds good of the manufacturer. If a 
 manufacturer finds his sales decreasing, he decreases 
 the quantities of raw material under treatment, and 
 does not even maintain the whole of his plant in 
 efficient repair. Every contraction in the quantity 
 demanded, therefore, operating through price and 
 profit, reduces the stock of shop goods and raw 
 material, and causes portions of the existing plant to 
 be no longer maintained. No matter how much 
 capital may be available for use, the inducement to 
 use it depends exclusively on the demand for com- 
 modities, and if this demand decreases a force is set 
 in operation which, working through price and profit 
 at each stage in the process of production, de- 
 creases the quantity of forms of capital in existence. 
 This decrease is in no wise due to any difficulty in 
 maintaining and keeping these forms in order or in 
 replacing them by new ones, but is due exclusively to 
 the fact that no one has any inducement to maintain 
 them or to replace them by new ones. 
 
 Although it has been shown in the preceding argu- 
 ment that the money income of the community, being 
 composed of the margins of gain at different points 
 in the productive process, varies with consumption, 
 it is important to identify the actual money paid by 
 consumers for commodities as the ultimate source of 
 all incomes. If we consider the individual in a 
 community, it is evident that his income is received 
 by him as payment for the use of that requisite of 
 production which he owns. If he be a labourer, he 
 
THE PHYSIOLOGY OF PRODUCTION. 89 
 
 receives his income (wages) as. a demand for the use 
 of his labour ; if he owns land, mines, &c., he receives 
 his income (rent) as payment for the use of the 
 same ; if he owns capital, he receives his income 
 (profit) as payment for the use of his capital. 
 
 Directly or indirectly every individual's income is 
 derived from one or other of these funds ; whether 
 he be mortgagee or annuitant, shareholder or what 
 not, his income can invariably be referred back, either 
 to the rent of a natural agent, to the profit on capital, 
 or to the wages of labour. 1 
 
 The individual sells a given total of the use of a 
 requisite of production owned by him, and the price 
 he receives for this use is his income. Thus the land- 
 owner sells the use of his land for a year, and the 
 price he receives for this use is his income (rent). 
 The labourer sells the use of his mental and bodily 
 abilities for a day, a week, or a year, and the price he 
 .receives for this use is his income (wages). The 
 capitalist sells the use of his capital, and the price he 
 receives for this use is his income (profit or interest). 
 Since, however, every individual's income may be 
 referred back to one or other of these funds, 2 it 
 follows that the sum of these prices is the aggregate 
 money income of the community. That is to say the 
 aggregate demand, or prices paid, for the use of the 
 requisites of production is the aggregate money income 
 of all the individuals composing the community. 
 
 1 We include under the head of wages all payments made for ser- 
 vices, those of the highly-trained professional man equally with 
 those of the mechanic. 
 
 2 We are here again following Prof. Cairnes, who shows that all 
 incomes are necessarily derived from production. (See ' Some 
 Leading Prin. Pol. EC.,' Chap. TI.) 
 
90 THE PHYSIOLOGY OF PRODUCTION. 
 
 It has already been seen that consumption of 
 commodities is the ultimate cause which determines 
 the extent of the use of these requisites of produc- 
 tion. It remains, therefore, only to illustrate more 
 precisely in what way the payment for these uses 
 of requisites of production is derived from the pay- 
 ment for commodities by consumers. So far as the 
 actual money received as income by the owners of 
 requisites of production is concerned, there is little 
 difficulty. This money received as income is con- 
 tinually applied to purchase shop-goods, and is paid 
 into the till of retail traders ; these traders pay in 
 their cash to the banks, daily or weekly, and this 
 cash is again withdrawn by capitalists, and applied 
 by them to pay wages, rent, and profit. To illus- 
 trate more clearly the actual series of payments that 
 take place, we will assume that a certain town spends 
 ,.30,000 a- week in bread; the .30,000, we may 
 assume, will be distributed as follows : 
 
 . . . 
 
 Bakers receive weekly foi bread - 30,000 All concerned in the baking and 
 and pay weekly to millers retailing of bread receive 
 
 for flour, . 20,000. weekly as income - 10,000 
 
 Millers receive weekly for flour All concerned in the milling of 
 
 from bakers - 20,000 the wheat - 2,000 
 
 and pay weekly to merchants 
 for corn, . 18,000. 
 
 Merchants receive weekly for All concerned in the transport 
 
 corn from millers - 18,000 and warehousing of the corn - 1,000 
 
 and pay weekly to farmers 
 for corn, .17,000. 
 Farmers receive weekly for corn, All concerned in the growing, 
 
 . 17,000 from merchants - 17,000 tlireshing, &c., of the wheat - 17,000 
 
 30,000 
 
 We thus see that the whole .30,000 is distributed 
 as rent, wages, and profit amongst all concerned in 
 the production of the commodity bread. The baker 
 
THE PHYSIOLOGY OF PRODUCTION. 91 
 
 pays the miller, and the miller the merchant, and the 
 merchant the farmer simultaneously. The baker 
 draws a cheque for . 20,000, which he gives to the 
 miller; the miller draws a cheque for . 18,000, 
 which he gives to the merchant ; and the merchant 
 a cheque for . 17,000, which he gives to the farmer. 
 But it may be asked, How can all these cheques be 
 met ? There are only 30,000 sovereigns, and cheques 
 are drawn for . 55,000. The answer is clear. The 
 baker, having drawn a cheque for . 20,000, must 
 pay in to his banker . 20,000 out of his . 30,000, 
 retaining merely . 10,000 with which to pay the 
 rent of his bakehouse, shop, &c., the wages of his 
 men, and his own profits and wages. The miller, 
 who receives . 20,000, having to meet his cheque ot 
 . 18,000 paid to the merchant, cannot draw in cash 
 more than . 2,000 ; with this . 2,000 he must pay 
 his rent, men's wages, and his own income. The 
 merchant, having to meet the cheque for . 17,000 
 he has given the farmer, can only draw . 1,000, and 
 out of this sum he must pay for the transport of the 
 wheat, rent of his stores, -&c., and his own income. 
 The farmer, however, has no cheque to meet, so he 
 can devote his whole . 17,000 to the payment of 
 rent, labourers' wages, and his own income. 
 
 The only sums in money withdrawn from the bank 
 are, therefore, the miller's . 2,000, the merchant's 
 . 1,000, and the farmer's . 17,000 ; that is to say, 
 that exact . 20,000 paid in by the baker to meet his 
 cheque for that sum. These sums are evidently the 
 demand or purchasing power exerted for the use of 
 the various requisites of production concerned in 
 the production of bread. If we assume the demand 
 
92 THE PHYSIOLOGY OF PRODUCTION. 
 
 for bread suddenly increased by one-half, it is clear 
 that each of these totals would be increased simul- 
 taneously ; the baker would have to buy more flour, 
 the miller more wheat, the merchant more wheat, 
 and the farmer would find himself provided with the 
 funds requisite to hire more land and labour. It 
 may, perhaps, be urged that the farmer cannot 
 supply more wheat than formerly. In that case the 
 merchant, the miller, and the baker will each and all 
 be limited to the sale of the old amount of wheat, 
 flour, and bread ; the increased demand will expend 
 itself in raising the price, and though the farmer sells 
 no more wheat than before, he will receive the addi- 
 tional funds requisite to enable him to increase his 
 purchases of the use of land and labour. 
 
 Mill rightly contended that the demand for shop 
 goods was not the demand for the labour which had 
 previously produced them, because the money I pay 
 to-day cannot have provided the wages which were 
 paid last year to the man who sowed the particular 
 grains of wheat from which my loaf has sprung. But 
 while it is true that the present demand for shop 
 goods is not the source from which past demand for 
 labour proceeded, it by no means follows that present 
 demand for shop goods is not the source of present 
 demand for labour. Take the case of a tanner, who 
 is also a shoe manufacturer and a retailer. The only 
 money he can receive is from the custom of his retail 
 shop, i.e., is the demand for boots. With this money 
 he pays the weekly wages of his ' shoe hands,' his 
 f leather finishers and dressers,' his ' yard-hands,' and 
 all concerned in the preparation of the leather and 
 its manufacture into boots. Part of the money he 
 
THE PHYSIOLOGY OF PRODUCTION. 93 
 
 receives daily as demand for boots he distributes 
 daily as demand for the use of labour. If the 
 demand for boots decreased, his demand for the use 
 of labour must necessarily decrease. If, on the other 
 hand, it increased, he would want more boots got 
 ready, more leather dressed, and more hides tanned, 
 and he would be provided with the funds requisite to 
 hire the additional labour required. The money 
 which his workmen receive as wages is part of the 
 money which his customers pay for boots. The 
 demand for boots is the source from which his 
 labourers' wages, his landlord's rent, and his own 
 income are drawn. 
 
 It is clear in the above case that rent, profits, and 
 wages are not paid by the tanner out of any fund 
 either of money or other property he has previously 
 become possessed of, but out of the proceeds of each 
 week's production. That is to say, the value put into 
 raw material is divided up when each piece of raw 
 material reaches the stage of commodity, and the 
 proceeds of the division are paid as rent, profit, wages. 
 The fact that rent, profit, wages are not paid in boots 
 but in general purchasing power does not impair the 
 value of this statement, for general purchasing power 
 is only effective on the supposition that a steady work 
 of production has been carried on in other branches 
 of industry similar in character to the work of the 
 tanning trade. 
 
 Or, again, to illustrate the same point, let us take 
 the whole work of a community conducted according 
 to an ideally uniform pattern. Let us assume that 
 every commodity has passed through ten processes, 
 occupying each a day, before it is finished, and that 
 
94 THE PHYSIOLOGY OF PRODUCTION. 
 
 the demand for each kind of commodity does not 
 vary from day to day, so that at the end of each 
 day's labour there are just so many loaves (or poten- 
 tial loaves) in each of the ten stages which must be 
 passed to make a finished loaf, so many coats (or 
 potential coats) in each of the ten stages which must 
 be passed to make a finished coat, and so with every 
 other kind of commodity. Let us further assume 
 that each labourer assists in advancing one piece of 
 wealth each day a single step towards becoming a 
 commodity. Lastly, suppose labour and capital 
 contribute equally towards the daily advance. Then 
 each body of ten labourers, working in conjunction 
 with capital, will bring one piece of wealth each day 
 into a state of commodity, and will (or should) receive 
 one-half at the end of the day in wages. Each man 
 will thus get one-twentieth of a commodity as his 
 day's wage, the capitalist also receiving one-twentieth 
 for each labourer employed. If we now suppose that 
 each commodity is handed over to consumers as soon 
 as produced, there will be at the beginning of each 
 day no finished products in the hands of the capitalist. 
 The latter will simply have his plant and raw material 
 in all stages short of commodity. In such a community 
 it would be obvious that the commodities paid as 
 profit and wages were paid out of the results of the 
 production of each day. It is true that nine-tenths 
 of the value of the actual commodities handed over 
 in profit and wages at the end of the day was created 
 in the nine previous days, but it is only handed over 
 on condition of having been replaced by an equivalent 
 value stored in other forms of wealth on their way to 
 become commodities. Here the whole of the com- 
 
THE PHYSIOLOGY OF PRODUCTION. 95 
 
 modities given as profit and wages are in effect the 
 creation of the one day's work. 
 
 The demand for labour and use of capital is here 
 obviously constituted by the commodities daily pro- 
 duced. The requisites of production owned by the 
 labourers and capitalist daily produce a certain total 
 of value, and this total of value is daily distributed to 
 all concerned as payment for the use of these requi- 
 sites. The labourers and capitalist daily demand 
 * one piece, of wealth/ and this ' one piece of wealth ' 
 daily demands the use of the requisites of production 
 owned by them. That is to say, the demand for com- 
 modities, and the demand for use of requisites of 
 production is the same phenomenon regarded from 
 different points of view. 
 
 In short, the use of natural agents, capital and 
 labour produces commodities, and demand for these 
 commodities is demand for the use of the requisites 
 of production. 
 
 In all periods, therefore, when the rate of consump- 
 tion does not vary, as assumed in our illustration 
 above, the quantity of commodities demanded is the 
 quantity of the. use of the requisites of production 
 demanded, or in other words consumption equals pro- 
 duction. Variations in the rate of consumption, 
 however, complicate the problem somewhat. We saw, 
 (p. 85), that when consumption increases, this increase 
 can only take place concurrently with a proportionate 
 increase in capital, an increase which is brought about 
 through the medium of price and profit, and which 
 at any given period is quantitatively related to the 
 increase in consumption. 
 
 The quantity of the use of the requisites of 
 
96 THE PHYSIOLOGY OF PRODUCTION. 
 
 production demanded will during such periods con- 
 sist 
 
 a. Of the quantity required to produce the commo- 
 dities demanded. 
 
 #. Of the quantity required to produce the addi- 
 tional capital rendered necessary by the 
 increase in a. 
 
 Though in this case the quantity of commodities 
 demanded is not identical with the quantity of the 
 use of the requisites of production demanded, it 
 nevertheless determines the more or less of this latter 
 quantity. Every increase in a involving more than an 
 equivalent increase, and every decrease in a involving 
 more than an equivalent decrease in the quantity of 
 the use of the requisites of production 1 demanded. 
 
 We saw (p. 88), that every individual receives his 
 income as demand for the use of a requisite of pro- 
 duction owned by him, and that the aggregate 
 demand for the use of the requisites of production is 
 the aggregate money income of the community. 
 Each individual's income being the price paid for a 
 given total of the use of a requisite of production 
 owned by him, it follows from the law of price 
 deduced on page 81 that any fall in this price shows 
 that the quantity of such use demanded has decreased 
 relatively to the quantity offered. 
 
 We now propose to show that such a fall has taken 
 place. To effect this purpose it is necessary to analyse 
 the phenomenon known as depression in trade. 
 
 This depression may be defined as a general 
 reduction in the rate of incomes. Whatever form 
 the particular complaint may take, a little analysis 
 will always reduce it to this. When workmen com- 
 
THE PHYSIOLOGY OF PRODUCTION. 97 
 
 plain that they cannot get work, it does not mean 
 that they feel an insatiable desire for prolonged hours 
 of toil, but that they want wages and cannot get 
 them. They would even prefer wages without work, 
 if it were possible. Similarly, when the trader com- 
 plains that ' there is nothing doing,' it does not mean 
 that he derives happiness from the constant and rapid 
 manipulation of his capital, but merely that he wishes 
 for the profit which that proceeding would presum- 
 ably afford him. And the landowner, likewise, when 
 he asserts that ' the country is going to the dogs,' and 
 that foreign wheat is responsible for this, does not 
 really hate foreign wheat, but only objects to the 
 reduction in rent which such wheat causes. Thus, in 
 each case it is a reduction of income that causes 
 individuals to inveigh against the evil times that 
 have befallen them. 
 
 Now, the individual's income, we have seen, is the 
 price paid for a given total of the use of a requisite of 
 production owned by him. This price, we have seen, 
 can only fall if the quantity of such uses demanded 
 has decreased relatively to the supply of such uses 
 offered. Depression in trade is, therefore, a decrease 
 in the quantity of the uses of the requisites of pro- 
 duction demanded relatively to the supply available, 
 and is resolvable into an insufficiency in the quantity 
 of the use of the requisites of production demanded. 
 But the quantity of commodities demanded deter- 
 mines the quantity of the uses of the requisites oi 
 production demanded ; if, therefore, this latter quan- 
 tity is insufficient, this insufficiency is due exclusively 
 to an insufficiency in the former ; that is to say, in 
 consumption. The only cause, however, which can 
 
 D 
 

 98 THE PHYSIOLOGY OF PRODUCTION. 
 
 lead to an insufficiency in consumption is the undue 
 exercise of the habit of thrift or saving, and this habit, 
 therefore, and depression in trade are merely different 
 phases of one phenomenon. 
 
 Or our argument may be stated in inverse order in 
 the following propositions : 
 
 1 . Depression in trade is a general fall in the rate of 
 
 incomes (i.e., a given total of a requisite of 
 production yields its owner a less income). 
 
 2. A general fall in the rate of incomes proves that 
 
 the quaniity of the use of the requisites of 
 production demanded has decreased relatively 
 to the supply. 
 
 3. The quantity of the use of the requisites of pro- 
 
 duction demanded is determined by the quan- 
 tity of commodities demanded (consumption). 
 
 4. Consumption would always equal the maximum 
 
 possible, were it not for the habit of saving or 
 thrift. 
 
 Whence we conclude depression in trade and 
 excessive thrift are terms describing different phases 
 of the same phenomenon. 
 
 Excluding from consideration the complexities 
 introduced by an increase in the rate of consumption, 
 and consequently in the quantity of capital required, 
 we may summarise our theory thus : the community 
 considered as the recipient of money incomes pro- 
 duces consumable articles ; the community considered 
 as the spender of money incomes buys and consumes 
 these articles. If, owing to its desire to save, it 
 refrains from spending the whole of its money 
 income, the whole of the consumable articles pro- 
 duced cannot be sold. Over-supply is, in consequence, 
 
THE PHYSIOLOGY OF PRODUCTION. 99 
 
 caused, and prices and incomes continually fall until 
 the production of consumable articles is reduced to the 
 total actually consumed. 
 
 It is important to note that this conclusion does 
 not rest on abstract theory, but is founded on the 
 admitted commercial fact of depression in trade. 
 The identification of depression in trade with insuf^i 
 cient consumption or excessive thrift is, we venture 
 to assert, unassailable. In Chapter II. we showed 
 that the habit of saving might lead to an insufficiency 
 in the rate of consumption, or, as economists prefer 
 to call it, to over-supply ; in this chapter we have 
 shown that it actually has done so. 
 
 This conclusion is of critical importance to the 
 community ; it means neither more nor less than 
 that the community could at once and permanently 
 enjoy a larger income. It means that the East-end 
 problem, with its concomitants of vice and misery, 
 is traced to its economic cause, and that this economic 
 cause is the most respectable and highly extolled \\ 
 virtue of thrift. 
 
100 OVER-PRODUCTION AND ECONOMIC CHECKS. 
 
 CHAPTER IV. 
 
 OVER-PRODUCTION AND ECONOMIC 
 CHECKS. 
 
 MOST modern economists deny that consumption 
 could by any possibility be insufficient. To suggest 
 that there may be an excess of forms of capital, over- 
 production of goods, general fall of prices, reduction 
 of incomes, and all the evils on which we have 
 dwelt, is regarded as an absurdity too obvious to 
 need refutation. Is it reasonable to assume that any 
 community will be so foolish as to attempt to save 
 too much ? Can we find any economic force at work 
 which might incite a community to this excess, and 
 if there be any such forces are there not efficient 
 checks provided by the mechanism of commerce ? 
 These are the questions asked by economists, and to 
 which the present chapter provides an answer. 
 
 It will be shown, firstly, that in every highly 
 organised industrial society there is constantly at 
 work a force which naturally operates to induce 
 excess of thrift ; secondly, that the checks alleged 
 to be provided by the mechanism of commerce are 
 either wholly inoperative or are inadequate to pre- 
 
OVER-PRODUCTION AND ECONOMIC CHECKS. 101 
 
 vent grave commercial evil. But before setting 
 closely to this task, it is necessary to draw attention 
 to the extreme negligence and indifference with which 
 most modern writers have treated the theory of 
 General Over-production. So firm is their confidence 
 in the value of the automatic machinery of commerce 
 that they are unable to listen with patience to any 
 criticism of the construction of that machinery. If 
 anything goes wrong with the working, there is a 
 system of checks and balances which will be sure to 
 set it right again, or, at any rate, prevent the evil from 
 becoming serious. Hence they have deemed it 
 necessary to do little more than assign a casual re- 
 cognition to what they call the exploded doctrine of 
 Over-production . 
 
 It appears to them a mere absurdity to suppose 
 that in a community where the only possible motive 
 to produce is the desire to consume, an increase in 
 production will not at once be followed by a corre- 
 sponding increase in consumption. The wants of man- 
 kind are infinite ; if you increase the amount that can 
 be produced, you increase, ipso facto, the amount that 
 will be consumed. The brief answer which Ricardo 
 gave to the contentions of Malthus and Chalmers 
 seems to have been accepted as sufficient by most 
 later economists. " Productions are always bought by 
 productions or by services ; money is only the medium 
 by which the exchange is effected. Hence the in- 
 creased production being always accompanied by a 
 correspondingly increased ability to get and consume, 
 there is no possibility of Over-production." 1 That 
 
 1 Kicardo, ' Prin. of Pol. Econ.,' p. 362. 
 
102 OVER-PRODUCTION AND ECONOMIC CHECKS. 
 
 Commodities are purchased by Commodities, and that 
 along with everything that is produced the power to 
 purchase and consume it is produced have become 
 mere commonplaces of economics. 1 But it must be 
 observed that a further assumption underlies Ricardo's 
 argument, viz., that the power to purchase which is 
 produced must always be exercised. The old notion 
 that it was possible for goods to remain unpurchased 
 and unconsumed because there was no money to buy 
 them, has disappeared before a clearer understanding 
 of the function of money. But though this power to 
 purchase and consume whatever is produced always 
 exists, is it equally certain that this power must 
 always be exerted ? To the question put in this form 
 it will be readily replied that a certain portion of the 
 Power to Purchase commodities must be withheld in 
 order that sufficient saving may occur to provide 
 any new capital which may be required to meet any 
 
 1 This argument is specifically adopted by Mill, who says : ' What 
 constitutes the means of payment for commodities is simply com- 
 modities. Each person's means of paying for the productions of 
 other people consists of those which he himself possesses. All sellers 
 are inevitably, 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 double demand as well as supply ; everybody would be able 
 to buy twice as much, because everyone would have twice as much 
 to offer in exchange.' (Mill, ' Prin. Pol. EC.,' Book III., Chap. XIV., 
 s. 2.) To this Prof. Marshall, alone amongst economists, takes ex- 
 ception, and pertinently remarks : ' But though men have the power 
 to purchase, they may not choose to use it.' (' Economics of In- 
 dustry,' Book III., Chap. I., s. 4.) But he fails to grasp the critical 
 importance of this fact, and appears to limit its action to periods 
 of 'crisis.' 
 
OVER-PRODUCTION AND ECONOMIC CHECKS. 103 
 
 expected increase in Consumption. 1 But with the 
 exception of this needful provision for future pro- 
 duction, the whole of what is produced must always 
 be consumed. If we ask why it must be consumed, 
 we are met once more with the answer that it is 
 absurd to suppose that people will go on producing 
 unless they consume what they produce, when the 
 only end or object of work is the satisfaction of 
 wants. Thus, the very fact that people produce is 
 proof positive that the Power to Purchase and con- 
 sume what they produce is actually exercised. " The 
 error is in not perceiving that though all who have 
 an equivalent to give might be fully provided with 
 every consumable article which they desire, the fact 
 that they go on adding to the production proves that 
 that is not actually the case." 2 
 
 "We said before that whoever brings additional 
 commodities to the market, brings an additional power 
 of purchase ; we now see that he brings also an 
 
 1 Economists usually assert that saving is necessary to maintain 
 the fixed capital in repair, and to replace such of it as may from 
 time to time be worn out. This is, however, an incorrect use of the 
 word saving ; no saving is effected unless the aggregate of capital is 
 increased. If the community at the end of the year only possesses 
 exactly the same total of capital that it had at the beginning, how 
 can it be said to have saved ? 
 
 2 Here, again, Mr. Mill's Wage-fund theory comes in as a ' deus ex 
 maehinfc Suppose that certain individuals really have more ' Pur- 
 chasing Power ' than they care, either at once or in the future, to use, 
 all they have to do is to apply it ' productively ' (?) by adding it to 
 the Wages-fund ; the labourers will then consent to use the Purchas- 
 ing Power instead of them. What would happen if the labourers 
 were content with their previous necessaries Mill never stops to 
 ask. Suppose that they tried to save this Purchasing Power handed 
 on to them, what would happen ? Mill seems to assign to Capitalists 
 a monopoly of the folly of saving without any object to gain. 
 
104 OVER-PRODUCTION AND ECONOMIC CHECKS. 
 
 additional desire to consume, since if he had not that 
 desire he would not have troubled himself to pro- 
 duce." 1 This is a complete expression of the rough- 
 and-ready general opinion which pronounces Over- 
 production impossible. It rests entirely upon the 
 correctness of the assumption that the sole motive to 
 production is the desire of the producer to consume 
 what he has produced or what he can get for it. Now, 
 of course, if it were the case that immediately any 
 commodity was produced the person or persons con- 
 cerned in the production insisted on immediately 
 consuming it or consuming what they could get in 
 exchange for it, it would be impossible to conceive of 
 such a thing as Over-production. It is clear that 
 Robinson Crusoe alone on his island would never 
 produce anything which he did not desire to consume ; 
 he would never be guilty of such a folly as Over-pro- 
 duction, for his only motive to produce is the desire to 
 consume. But is this equally true of individuals in a 
 fully organised industrial society ? Is the only motive 
 which induces them to work the desire to consume 
 ^what they produce ? Xo ! there is another motive 
 present, the desire to save. This is as real an acting 
 motive as the other. But, it will be urged, the desire 
 to save only means a desire to consume at some 
 future time. We reply, Yes ; but to consume what ? 
 Not as a rule to consume what is saved, or any 
 existing value, but to consume something which 
 shall in the future be produced by the assistance of 
 that which is saved. In a word, the real, direct) im- 
 mediate object of such production is the establish- 
 
 1 Mill, 'Prin. Pol. Econ..' TIL, Chap. IV., s. 3. For the similar view 
 of Mr. F. A. Walker, see his ' Pol. Ee.,' 3rd eel., p. 318. 
 
OVER-PRODUCTION AND ECONOMIC CHECKS. 105 
 
 ment of that which is produced as a source of future 
 income. In order to achieve this object the producer 
 seeks to add this ' Saving ' to the total of existing 
 Capital. It should clearly be recognised that though 
 there may be present in his mind an intention to 
 consume in the future the return which this piece of 
 Capital may bring in, the original motive to produc- 
 tion was not the desire to consume what was produced 
 or what he could get in exchange for it. Thus the 
 desire of individuals to consume what they produce, 
 considered by itself, furnishes no limitation to their 
 willingness to produce. The desire to save may lead 
 them to increase their rate of production indefinitely 
 beyond the desire for present or immediately future 
 consumption. Mill, then, has no right to conclude 
 that the very fact of a thing being produced is a proof 
 that the power to consume it will be exercised. The 
 desire to save and store up purchasing power is as 
 genuine a motive to production in the individual as 
 the desire of immediate consumption. 1 ' But how will 
 this lend a possibility to Over-production ?' It may 
 be urged, ' You have already shown that it is impos- 
 sible to effectually save more than suffices to minister 
 to future Consumption, why, then, will a community 
 be so foolish as to try to save more than this ?' The 
 answer to these questions discloses the fundamental 
 fallacy which underlies the Economist's view of 
 Saving, the assumption that the interests of the Com- 
 munity must always be identical with the interests of 
 its several members. The statement of Adam Smith/ 
 
 1 Mr. Walker quite overlooks this in his account of the motives 
 to produce, see his 'Pol. Econ.,' 3rd ed., pp. 318 to 328. 
 
 2 'Wealth of Nations,' Bk. IV., Chap. II., s. 1. 
 
106 OVER-PRODUCTION AND ECONOMIC CHECKS. 
 
 11 What is prudence in the conduct of a private family 
 can scarce be folly in that of a great nation/' has been 
 taken too generally for a gospel truth. This view, that 
 a community means nothing more than the addition 
 of a number of individual units, and that the interests 
 of Society can be obtained by adding together the in- 
 terests of individual members, has led to as grave 
 errors in Economics as in other branches of Sociology. 
 The confident assumption, that if individuals look 
 carefully after their own private interests, the welfare 
 of the whole community will be incidentally secured, 
 is the true explanation of the indifference with which 
 students of the mechanism of commerce have regarded 
 all such criticism of the construction of that machine 
 as is contained in theories of Over-production. Now, 
 it is important to look closely into this assumption, 
 for it does more than explain why economists have 
 slighted all theories of Over-Supply. The disclosure 
 of the falsehood on which this assumption rests will 
 also disclose the existence and nature of that force 
 which gives to Over- Supply an actual existence in the 
 world of commerce. 
 
 If the interests of each individual in a community 
 were always identical with the interest of the com- 
 munity there could be no such thing as over-supply. 
 It is impossible to suppose that a company of men, 
 producing in common for the common good, would at 
 any time produce more than was required for con- 
 sumption in the present or near future. It is, in fact, 
 the clash of interests between the community as a 
 whole and the individual members in respect to 
 Saving, that is the cause of Over-Supply. In order 
 to understand this diversity of interest, it is necessary 
 
OVER-PRODUCTION AND ECONOMIC CHECKS. 107 
 
 clearly to ascertain what the limits- of available thrift 
 are, for the individual and for society. First, let us 
 look at the individual in respect to the power of 
 Saving. An able and industrious man may be able by 
 working hard for twenty years to retire from business 
 and live during the rest of his life upon his savings ; 
 that is to say, he may during the earlier part of his 
 life anticipate the work he would have otherwise been 
 obliged to spread over his whole life. It matters not 
 for our present consideration whether he has kept his 
 Savings in the form of money stored in a stocking at 
 home, or has invested it so as to gain an income. 
 The effect of his action has been to escape the 
 necessity of future labour by an excess of labour in 
 the past. 
 
 Doing more work than was sufficient to satisfy his 
 present wants, he gave that extra work to others, 
 receiving in return certain money tokens. The posses- 
 sion of these tokens, which he has hoarded up at home, 
 or invested abroad, so as to increase their number, will 
 enable him, when he retires from business, to compel 
 other people to give him the products of their past 
 labour, or to do actual work for him without his 
 doing any work in return. His past production has 
 provided him with a lien upon future production. He 
 has to all intents and purposes been enabled to store 
 up past labour for future use. But how has he been 
 enabled to effect this ? The actual material forms in 
 which his past labour has been stored have not sur- 
 vived during the interval between the exercise of the 
 labour and the future use of it. The fact that others 
 had an immediate use for the forms of his past labour 
 was what enabled him to succeed in storing up the 
 
108 OVER-PRODUCTION AND ECONOMIC CHECKS. 
 
 value of his work and usin ; it in the future. If he 
 had been obliged to store up, not the money tokens 
 he received for the immediate use of his work, but the 
 actual forms in which his work stood until he wished 
 after twenty years to use them, or to exchange them 
 for other ' utilities or conveniences/ he would find 
 himself unable to do so, unless he were engaged in 
 work of exceptional durability (such as diamond 
 cutting), and even then changes in fashion and the 
 introduction of cheaper methods of production would 
 be liable to impair the value of his savings. How- 
 ever, by giving up the produce of his labour to some 
 one who has a present use for it, and receiving money 
 tokens in its place, it is possible to escape the neces- 
 sity of doing any work in the future by a sufficient 
 amount of productive energy in the past. His past 
 work will enable him to obtain any kind of wealth or 
 service in the future without any present exertion on 
 his part. 
 
 This is what an individual can do. Can a Com- 
 munity do the same ? There is no limit to efficacious 
 thrift on the part of an individual. Is there any limit 
 to the efficacious thrift of a Community ? We saw 
 that an individual might so work in the past as to 
 avoid all work in the future. Does this hold of a 
 Community ? Obviously not. There are certain 
 forms of work which a Community cannot anticipate, 
 certain forms of productive labour which cannot be 
 stored at all. 
 
 a. A large part of the labour of producing perish- 
 able gotds cannot be anticipated. In so far as the 
 term ' perishable ' applies in a greater or less degree 
 to all forms of Commodities, this restriction has a 
 
OVER-PRODUCTION AND ECONOMIC CHECKS. 109 
 
 general bearing. With regard to the vast amount of 
 labour engaged in producing articles of Food the limi- 
 tation is almost absolute. The greater part of the 
 work of producing food cannot be stored by the com- 
 munity. The same rule applies in a less degree to 
 the production of clothing and other more enduring 
 forms of material commodities. Rust and moths, the 
 dangers of destruction by fire or other accident, 
 changes of fashion, &c., cause a total or partial loss of 
 value in the case of all kept commodities. Generally, 
 it may be said that such labour can only be antedated 
 within certain time limits, and even then subject to 
 considerable losses. 
 
 This consideration imposes an absolute limit on 
 what may be called ' anticipatory production ' in a 
 society organised on commercial principles. No man 
 will spend twenty shillings in producing an article 
 for future consumption, if by retaining the twenty 
 shillings and producing the article at a later period 
 immediately prior to its consumption, a larger price 
 can be obtained. It pays better to retain the money 
 and to produce in the future rather than to produce 
 in the present for future consumption. 
 
 /3. The greater part of that labour, which con- 
 sists not in imparting new shape or qualities to 
 material objects, but in moving them to the exact 
 place where they are wanted, cannot be anticipated, 
 but requires to be freshly exercised in accordance 
 with the requirements of each moment and each 
 consumer. 
 
 y. Most of that labour which is used to produce 
 non-material commodities is incapable of being stored, 
 e.g., most intellectual or artistic labour, e.g., of Actors, 
 
110 OVER-PRODUCTION AND ECONOMIC CHECKS. 
 
 Singers, Preachers, &c. Under this head may also 
 come most of the work of Domestic Service. 
 
 Some forms of intellectual and artistic labour, it is 
 true, may be more effectually stored than any 
 material objects, and may form KTii/mara e aa, but 
 most of the less exalted forms demand constant 
 renewal. 
 
 S. The work of repairing loss of machinery caused 
 by waste or accident cannot be stored. 
 
 . The whole labour of supplying new wants can- 
 not be stored. 
 
 Thus it appears that a large part of the total of 
 productive labour must be done continuously, and is 
 incapable of being stored. A whole community is 
 thus incapable of doing what we saw an individual 
 can do. A community cannot by working extra hard 
 in the present avoid the necessity of doing any work 
 in the future. Our law of Quantitative Relation 
 asserted a fixed relation between the Amount of 
 Present Production and the Amount of Future Con- 
 sumption. We now further see that this Productive 
 work of providing for Future Consumption cannot be 
 achieved by a series of bursts of productive activity, 
 followed by periods of idleness, that any tendency to 
 this spasmodic action is attended by a loss in the value 
 of the work. It follows, that the economically effi- 
 cient mode of Production, from the point of view of a 
 Community, is a continuous even exercise of pro- 
 ductive energy directed to the supply of immediately 
 future Consumption, and that any attempt on the 
 part of the community to do work before it is econo- 
 mically required must be paid for by a certain loss in 
 the value of the work. 
 
OVER-PRODUCTION AND ECONOMIC CHECKS. Ill 
 
 Thus we see that while there is no limit to the 
 effective thrift of an individual, there is a limit to 
 that of the community. But the thrift of the com- 
 munity is composed of the thrift of individuals. It 
 is clear, then, that if the united thrift of individuals 
 passes the limit imposed by the interests of the com- 
 munity, thrift ceases to be as effectual as before, even 
 from the individual's point of view ; that is to say, 
 though any individual may anticipate all future 
 labour, every individual cannot. If every individual 
 were seized with a desire to work harder this 
 year in order to have a complete holiday next 
 year, they could not effect this object, though any 
 one or more might succeed in doing so. But though 
 in reality the number of individuals required to do 
 the amount of saving which is economically useful is 
 limited, this restriction does not act as a deterrent in 
 the case of any individual desirous to save. For 
 whether the amount of thrift at present practised 
 in a community is or is not sufficient, the individual 
 can always save. If it is not sufficient, his savings 
 will have a full economic value with the savings 
 of others ; if it is sufficient, he runs a certain risk 
 of finding that his savings are not wanted, but he 
 has always the chance of ousting the savings of 
 another. 
 
 The only absolute limit to the amount that an indi- 
 vidual could save would be the total Capital which 
 the Community can profitably use. It is abstractedly 
 conceivable that an individual or small group of indi- 
 viduals should by thus possessing themselves of the 
 total capital negative all the value of the thrift of 
 other individuals in the community. There is thus 
 
112 OVER-PRODUCTION AND ECONOMIC CHECKS. 
 
 nothing to limit the proportion of the total efficient 
 thrift of a community which may be exercised by 
 any individual. If the Community wishes to increase 
 its Capital, it must consent to increase its Consump- 
 tion ; but the individual need not increase his Con- 
 sumption in order to increase his Capital ; indeed, 
 the simplest and most usual method is to decrease 
 his consumption, and this is the method which 
 philanthropists and economists invariably urge. The 
 limitation of National Thrift assigns no absolute limit 
 to the effectiveness of individual thrift. So much 
 Saving can be done by the community, how much of 
 it shall be done by this individual ? It is not to the 
 interests of the community that there should be more 
 Saving done than is just sufficient to furnish the 
 requisite quantum of Capital. In a Communistic 
 Society, where the interests of individuals were iden- 
 tical, it is clear that no more Saving would be 
 attempted than this requisite quantity ; but the case 
 is different in an individualistic Society. Each is com- 
 peting against the other ; each is seeking to do 
 himself the largest portion of the useful Saving. An 
 individual can always save. 
 
 Now, it is just this spirit of competition among 
 individuals which supplies the force that operates to 
 bring about Over-production. If the full number 
 of material forms of machinery, raw material, and 
 goods requisite to complete the economic Capital 
 of the community is already present, is it not still 
 open to the individual to save and create new 
 forms, and apply them so as to oust the forms 
 of his competitors ? A certain amount of ma- 
 chinery may be economically required to supply the 
 
OVER-PRODUCTION AND ECONOMIC CHECKS. 113 
 
 number of shoes for the retail market. The full 
 amount of this machinery may be already in exist- 
 ence. But that will not prevent me from applying 
 my Saving to the production of other shoemaking 
 machines if I think that I can produce the more 
 efficient machines, which will render useless some of 
 those existing at present and do the work which they 
 would otherwise have done ; or if, with similar 
 machinery, I can produce more cheaply, by using 
 brown paper in the place of leather, or by beating 
 down the wages of my workpeople, and thus force 
 some of the previously existing machinery to stand 
 idle. 
 
 It is true that I may fail in my attempt. I may 
 produce machines inferior to those already in use, 
 or otherwise fail to produce more cheaply. In that 
 case I shall have tried to save, have stored up the 
 material forms of Savings, but have effected no real 
 Saving for myself. But whether I succeed or fail, it 
 is clear that my thrift in no wise affects the total 
 economic thrift of the community, but only deter- 
 mines whether a particular portion of the total thrift 
 shall have been exercised by myself or by somebody 
 else. It is, of course, true that the inducement to in- 
 dividuals to save is by no means always the same. 1 
 
 If a community is provided with the smallest num- 
 ber of forms of Capital requisite to supply future 
 Consumption, each of these forms must be considered 
 to have a full and equal value in the aid it renders 
 production ; all parts of the total capital are put to 
 
 1 In Chapter VI. we shall show how the thrift of one part of the 
 community has power to force another part to live beyond their 
 income. See pages 185 and 186. 
 
 D 2 
 
114 OVER-PRODUCTION AND ECONOMIC CHECKS. 
 
 a full economic use. Since this Capital is the result 
 of previous thrift of individuals, we may say this, 
 that the thrift of individuals has a full and even 
 economic value, and the reward of that thrift will be 
 full and equal. This is what may be termed the 
 normal healthy condition of commerce, where every 
 piece of Savings applied as Capital has a full use, and 
 returns a full profit to its owner. But as soon as 
 competition among individuals leads to the applica- 
 tion of a larger number of forms of Capital than are 
 required, it is clear that the average productive work 
 done by each form of Capital is now smaller than 
 before. Either all the forms of Capital are now 
 less fully used than before, or some of the old forms 
 are displaced by new forms, and are no longer used at 
 all. In either case this creation of excessive number 
 of forms of Capital has lowered the average value of 
 each form. 
 
 The operation of this spirit of competition among 
 individuals in an industrial community may be fairly 
 illustrated by the conditions of a competitive exami- 
 nation for a limited number of posts or prizes. A 
 dozen posts are offered for open competition to the 
 most successful among fifty candidates, sixty per cent, 
 of marks being required as a qualification. So far 
 as the examination is concerned, it is only requisite 
 that twelve out of the fifty candidates should do 
 enough work to obtain each sixty per cent, of the 
 marks. All the work done in excess of this by the 
 twelve successful candidates and the whole of the 
 work done by the thirty-eight unsuccessful candidates 
 is entirely void of result so far as the examination is 
 concerned ; that is to say, if it had not been done, 
 
OVER-PRODUCTION AND ECONOMIC CHECKS. 115 
 
 the result would have been just the same. Now, if 
 these candidates were, before they began to prepare 
 for the examination, to come to a mutual agreement 
 with a view to so arranging matters that they should, 
 as a company, do the least possible work consistent 
 with obtaining the desired result, they would select 
 the twelve among them who were at the present 
 time most advanced in attainments, and who could, 
 therefore, presumably be coached most easily, so as to 
 obtain the requisite minimum of marks ; these twelve 
 would do what work was required, the other thirty- 
 eight would do no work. 
 
 But what occurs under ordinary conditions of com- 
 petition is this. The consideration of the number of 
 vacant posts and of the minimum of marks required 
 have no limiting effect on the amount of work the 
 candidates do. Each candidate has, or thinks he has, 
 a chance of success, and this chance stimulates him 
 to work. Thus the total of work done is far 
 in excess of that which the conditions of the ex- 
 amination required. It is further to be observed 
 that in proportion as the chance of success is 
 theoretically smaller, the stimulus to work is greater. 
 If there be fifty candidates for twelve posts, the 
 amount of work done by each candidate tends 
 to be greater than if there were only thirteen 
 candidates for the same number of posts. There 
 is, no doubt, a limit to the operation of this law. 
 When the disproportion of candidates to places 
 reaches a certain height, the smallness of the 
 hope of success which the average candidate feels 
 will diminish rather than stimulate his energy ; but, 
 in any case, the amount of work done will be vastly 
 
116 OVER-PRODUCTION AND ECONOMIC CHECKS. 
 
 beyond the measure of the actual work which has an 
 efficient value in determining success. 
 
 So with the trade competition in an ordinary com- 
 mercial society. Though the amount of thrift which 
 can be effectually exercised by the whole society is 
 strictly limited, this limit imposes no such absolute 
 restriction upon the thrift of any individual. The 
 thrift of the individual consists in getting possession 
 of the material forms of capital ; whether or to what 
 extent these forms are economically required, or will 
 be actually and fully used to assist future production, 
 is dependent on facts which are not immediately and 
 clearly before the eyes of the individual when he is 
 seeking to save. 
 
 It may be well here to call attention to an im- 
 portant fact which has a bearing upon the relation 
 between the economically desirable rate of saving 
 and the rate of consumption. The quantity of capital 
 stored in Machinery and Plant at each stage in pro- 
 duction required to assist a given rate of production 
 of Commodities is by no means fixed. The constant 
 tendency of improvements in the arts of manufacture, 
 and even in the arts of storage of goods and retailing, 
 is to lessen the amount of real Capital required at the 
 different stages in production. Thus, assuming that 
 the rate of consumption in a community remained 
 the same, the amount of effectual saving which could 
 be stored in forms of capital would continually 
 diminish ; that is to say, the present rate of pro- 
 duction could be carried on with a smaller amount of 
 Capital. 
 
 In Chapter II. we have proved 
 
 That the existence of a distinct Quantitative Rela- 
 
OVER-PRODUCTION AND ECONOMIC CHECKS. 117 
 
 tion between the rate of Present Production and the 
 rate of immediately Future Consumption implies a 
 theoretic possibility of general Over-Supply (orllnder- 
 Demand). 
 
 We have now proved 
 
 That the competition among individuals in an or- 
 dinary commercial society tends continually to the 
 establishment of actual Over-Supply. 
 
 We have now to examine two considerations, which, 
 according to most modern economists, furnish efficient 
 checks to a condition of Over-Supply. 
 
 These are 
 
 I. A fall in general prices, which, by causing an 
 increased demand for Commodities, is alleged to pro- 
 vide an economic use for what would otherwise have 
 been Over-Supply. 
 
 II. Such a fall in the rate of interest (or profit) as 
 will act as a check upon Saving, and restore the proper 
 relation between production and consumption. 1 
 
 1 So persistent is the assumption among economic writers that the 
 machinery of commerce is a self-adjusting one which cannot get 
 much out of working order, that they seldom take the trouble to 
 distinctly state the nature of the economic checks to Over-Produc- 
 tion. But the general tenour of their reasoning is in complete 
 accord with the following statement of Laveleye ; ' When there is 
 a lack of equilibrium between production and consumption certain 
 influences come into play, which tend to restore this in the following 
 way : Too many shoes are made. To sell the surplus shoemakers 
 will lower their prices. This will have two results : First, the fall 
 of price will increase the number of consumers ; secondly, shoe- 
 makers, finding themselves at a loss, will make fewer shoes, until 
 the equilibrium is here again established.' (Laveleye, ' Elements of 
 Pol. Econ.,' p. 99.) This argument, irrefutable as applied to the 
 interests of any single branch of production, is considered a sufficient 
 answer to those who have asserted the possibility of general Over- 
 production. 
 
118 OVER-PRODUCTION AND ECONOMIC CHECKS. 
 
 Before passing to a closer examination of the value 
 of these two checks, one point must be clearly 
 marked. The fall in retail prices and the fall in rate 
 of interest, which are the operative forces in these 
 alleged checks, are both acknowledged to be results 
 brought about by an actual condition of Over-Supply. 
 However small this amount may be, there must be 
 some Over-Supply actually existent before either of 
 these alleged preventives can be set in motion. No 
 mere tendency to Over-Supply can have any effect. 1 
 Much false argument in economics is based upon a 
 wrong use of the term tendency. Loose thinkers 
 are sometimes induced by their perception, that the 
 main forces with which Economics deal are often 
 checked or turned aside in practice, to speak of these 
 forces as tendencies, meaning by the term forces 
 which would act if they could. Now, such a ten- 
 dency has no value and could have no effect ; 
 it has no real existence, and can work none of 
 the miracles imputed to it. A force which does 
 not act as it would otherwise have acted because 
 its action is subject to the interference of another 
 force does not therefore lapse into a tendency ; 
 it is just as real a force as before. There is no 
 such thing as a tendency to Over-Supply. Either 
 there is under supply of the forms of capital eco- 
 nomically requisite to assist in producing what 
 people would be willing to consume, or there is 
 exactly the right number of forms, or there is 
 Over-Supply. There is in no case any commercial 
 
 1 Malthus clearly recognised that if a fall in profits was to serve 
 as a relief to ' a glut of Commodities,' there must be an actual glut. 
 See Malthus, ' Pol. Econ.,' Ch. I., s. III. 
 
OVER-PRODUCTION AND ECONOMIC CHECKS. 119 
 
 fact which answers to the name, ' tendency to 
 Over-Supply.' 
 
 Let us now turn to the examination of the opera- 
 tion of the first of the two alleged preventive checks, 
 that of falling prices. 
 
 The fuller statement of this economic argument is 
 as follows : The smallest quantity of general Over- 
 Supply will cause a fall in general prices ; this fall in 
 general prices will increase the quantity of com- 
 modities demanded, and will continue to act in this 
 manner until the quantity demanded has assumed the 
 same relation to the increased Supply as the old 
 quantity demanded bore to the old Supply. 
 
 So beautifully simple is this argument that econo- 
 mists who have thought it worth while to deal argu- 
 mentatively with the theory of general Over-Supply 
 have generally put it forward as the briefest and most 
 complete refutation of a foolish heresy. Yet, when 
 we come to a closer examination of this argument, 
 the fallacy it rests upon will seem equally simple and 
 palpable. In the first place, it might well be urged 
 that the general Over-Supply may exist merely in 
 the earlier stages of production ; the excessive accu- 
 mulation will most naturally at first take the shape 
 of an excessive number of unfinished or finished 
 goods, or of the machinery which operates at the 
 early stages of production. In that case it would be 
 possible to urge that, although the prices of unfinished 
 or finished goods might fall owing to this excess, the 
 prices of retail commodities might remain as before, 
 the retailers reaping the whole advantage of the fall 
 in wholesale prices. 
 
 It will, in fact, be shown later (vide Chapter VI.) 
 
120 OVER-PRODUCTION AND ECONOMIC CHECKS. 
 
 that this is what actually occurs in commercial com- 
 munities; that the fall of wholesale prices is not 
 immediately followed by a corresponding fall in retail 
 prices ; that the latter is slow of operation, and does 
 not, when it occurs, exactly reflect the changes in 
 wholesale prices. 
 
 But, in order that the fallacious nature of the main 
 contention may be more apparent, we will not press 
 this point here, but will assume that wherever the 
 pressure of general Over-Supply may make itself felt 
 the fall in prices which it brings about is straightway 
 reflected in a corresponding fall of retail or shop 
 prices. The simple question which is before us is 
 this : Will the general fall of retail prices stimulate 
 an increased demand for shop goods, and thus 
 remedy the congestion due to over-production ? If 
 retail prices fall, it would seem as if purchasers ought 
 to be able to purchase more than they did before, 
 and that thus they will be tempted to raise their 
 standard of living. But before a person makes a 
 purchase he looks at two things : the price of the 
 article and the condition of his purse. If he finds 
 that he has less command of money than before, he 
 may not be more able or more willing to increase 
 his purchases, although the price of articles has 
 fallen. 
 
 We have assumed a general fall in wholesale and 
 retail prices. Before we can rightly ascertain whether 
 this will serve to stimulate demand, we must ask 
 another question. What is the effect of a general 
 fall of prices on the Income of the Community ? We 
 are not here speaking of the real income of the Com- 
 munity, which is the sum of values created during 
 
OVER-PRODUCTION AND ECONOMIC CHECKS. 121 
 
 the year, but of the money income of the Com- 
 munity. 
 
 We have seen that the money income 1 of each 
 individual in an industrial community, whether re- 
 ceived in the form of wage profit or rent, is ultimately 
 paid out of the money received by retailers for the 
 sale of commodities. If the amount of money re- 
 ceived by retailers rises, the general money income 
 of the community rises ; and if the amount received 
 by retailers falls, the general money income falls 
 with it. Thus every rise and fall in retail prices (the - - 
 money received by retailers) will mean a corre-// 
 sponding rise or fall of the money income of the 
 community. 2 How, then, will a general decline of 
 retail prices act as an effective stimulus to increased 
 demand for Commodities, when the average income 
 of consumers has fallen correspondingly? A man 
 
 1 It is true that in commerce it is usual to include in a man's 
 income not only the margin of profit upon sales effected, but also an 
 estimated value of unsold goods, &c. But although it is convenient 
 and reasonable that these should be taken into account in estimating 
 the money income of the individual, they cannot rightly be con- 
 sidered in estimating the money income of the community, for if 
 these unsold goods had been put into the market so as to force a sale, 
 this sale could only have been effected by causing a still further 
 reduction in general prices, and the total money received from the 
 whole amount of sales would not have been greater than that from 
 the smaller number. 
 
 2 We are here assuming that a community is entirely composed of 
 producers whose incomes are derived directly from sales of different 
 kinds. It is, however, clear that people in receipt of fixed money 
 incomes are enabled to raise their demand for commodities with 
 every fall in retail prices. In so far, however, as certain individuals 
 do not feel the effects of the general reduction of money incomes, 
 others must feel it more severely. Thus, for example, if the mort- 
 gagee still gets his interest, the landlord suffers more severely in 
 proportion. 
 
122 OVER-PRODUCTION AND ECONOMIC CHECKS. 
 
 who had previously an income of . 500 per annum 
 will not be induced to raise his standard of living by 
 a fall of fifty per cent, in retail prices when he per- 
 ceives that his income has fallen to the level of 
 .250 a year. 
 
 There is one objection to the argument, which 
 though it has been answered in effect by the proof 
 that all incomes are derived from, and dependent on, 
 retail sales, it may be well to deal with explicitly. 
 The objection will take the following shape : ' Re- 
 tail prices will only fall because the supply of Shop 
 goods is greater than before, while the demand is 
 supposed to remain the same. But the greater supply 
 of Shop goods implies a larger number of sales effected 
 at each preceding stage in the process of production. 
 Now it is true that each of these sales has been 
 effected at a lower price than previously, but it does 
 not follow that the money income derived by makers 
 and wholesale traders from their business is any less 
 than before, for the increase in number of sales may 
 be very w^ell considered to compensate for the lower 
 prices received. If, then, the money incomes of 
 these men remain the same as before, or do not fall 
 correspondingly with the fall of prices, when retail 
 prices are touched they will be able to take advantage 
 of the cheaper prices of shop goods, and will increase 
 their demand.' 
 
 To this objection there is the following answer : 
 Along with the fall of retail prices will come a fall of 
 the total receipts or incomes of all concerned in pro- 
 duction. Assuming that up to the time when retail 
 prices are affected, the incomes of makers and mer- 
 chants were the same as before, immediately retail 
 
OVER-PRODUCTION AND ECONOMIC CHECKS. 123 
 
 prices are affected the number of purchases from 
 makers and merchants, even at the lower prices, is 
 diminished, so that the latter find their incomes fall- 
 ing equally with the rate of fall of retail prices. The 
 slightest decline in retail prices which has been sup- 
 posed to induce those who up to the present moment 
 have been in receipt of their usual money income, to 
 increase their retail purchases, is found by them to 
 equally affect their own incomes, so that though they 
 would have increased their retail purchases had their 
 income stood steady, they will not now attempt to do 
 so. The real question at issue is one of time. If, 
 when the maker and merchant learn that retail prices 
 are falling, they look merely at their last month's 
 receipts, they will say, ' Well, our income, though 
 made out of more sales at lower prices, is steady ; now 
 that retail prices are falling we can afford to raise our 
 standard of living.' But if, as is more probable, 
 they look at the actual present and the probable 
 future, they will see that with each fall in retail prices 
 the demand for the goods they are selling is growing 
 less, that orders are falling off, and wholesale prices 
 falling still lower, and that their money income is 
 actually shrinking in strict accord with the fall in 
 retail prices. For it must be remembered that it 
 takes no time for the effect of a fall in retail prices to 
 operate along the whole process of production ; im- 
 mediately the receipts of retailers fall, the demands 
 at each point in production fall correspondingly ; the 
 effects are, in effect, simultaneous. We can, therefore, 
 assume no interval, even of a day, during which the 
 maker or the merchant can feel justified by present con- 
 siderations in increasing his demand for commodities. 
 
124 OVER-PRODUCTION AND ECONOMIC CHECKS. 
 
 But one final point remains for consideration. Sup- 
 pose that the community, or any large proportion of 
 the community, neglecting the corresponding shrink- 
 age of their incomes, insisted on taking advantage of 
 the fall in retail prices brought about by Over-Supply 
 to increase their number of purchases of Commodi- 
 ties, what would be the result ? Let us first note 
 precisely the nature of the action we impute to them. 
 Prices have fallen, say, twenty-five per cent., and all 
 incomes have fallen twenty-five per cent., for we may 
 assume for the purpose of argument that all incomes, 
 whether received as wages, profit, or rent, are equally 
 affected (though we shall see later on that this is not 
 actually the case, and that we are only entitled to 
 say that the average income has fallen twenty-five 
 percent.). Yet, notwithstanding the fact that they are 
 no better off than before, we will assume that a con- 
 siderable number of persons, looking only at the fall of 
 prices, increase their demand for commodities with- 
 out considering that by doing so they seem likely to 
 cut down their normal rate of savings, or even to 
 exceed their yearly income by running into debt. As 
 they thus thoughtlessly and blindly increase their 
 demand for commodities, they will find their money 
 income rising with each increase of demand. For, in 
 the first place, assuming the low retail prices were 
 untouched by the increased demand, the number of 
 retail sales has now increased, and with it the money 
 incomes of retail traders ; retail traders now increase 
 their orders of wholesale goods, and once more, 
 assuming the low prices stood, the income of whole- 
 sale merchants rises from the increased number of sales. 
 In like manner, at every stage in production there is a 
 
OVER-PRODUCTION AND ECONOMIC CHECKS. 125 
 
 rise of income through an increase of sales. But this 
 is not the only way in which the reckless demand for 
 Commodities raises incomes. As the fall of retail prices 
 was caused by the growing excess of supply over 
 quantity demanded at former prices, so the increased 
 demand for commodities will raise retail prices again 
 towards the old level. This old level will not, however, 
 be reached until supply is once more brought into the 
 normal, the old relation to quantity demanded ; that 
 is to say, until the whole of that Over-Supply of Shop 
 goods, which was the immediate cause of the decline 
 of prices, has been completely swallowed up. If we 
 suppose that consumers insist on increasing their con- 
 sumption of Commodities until this normal condition 
 of prices has actually been restored, what will be their 
 condition as regards money income and saving power ? 
 They will find their apparent recklessness to have the 
 force of a well-founded faith. Their money income 
 will rise apace with their increased consumption ; the 
 more they consume the more they will be able to 
 consume. This will continue until they have con- 
 sumed all that existed in the form of over-production 
 and have restored prices to the normal level. If they 
 do not stop even here, but, smitten with the desire 
 for constantly improving their standard of comfort, 
 continue to increase their demand beyond the former 
 level, they will find that prices will rise, that money 
 incomes will rise along with prices, and that produc- 
 tion at every point will strain every nerve in order to 
 keep pace with the increasing desire to consume, 
 giving full economic employment to as much labour, 
 capital, and natural agents as can be brought to bear 
 upon the arts of production. Nor is this all. Having 
 
126 OVER-PRODUCTION AND ECONOMIC CHECKS. 
 
 by an act of economic faith increased their consump- 
 tion without regard to the virtue of thrift, they will 
 find that along with every increase in consumption 
 more thrift becomes feasible. For thrift is only 
 operative when more forms of capital are economi- 
 cally required. So long as there existed Over-Supply 
 there was no room for thrift, as this Over-Supply is 
 removed by an increased rate of consumption, there is 
 once more place for new forms of Capital, and thrift 
 is again effectual. If the increased demand does not 
 stop with the return to previous conditions, but con- 
 tinues to grow so as to strain the productive machine, 
 there is an ever-growing use for more saving and more 
 thrift. And not only is more thrift possible, but it is 
 necessary. 
 
 If people would consume more they must save 
 more ; unless, indeed, their increased desire for con- 
 sumption is a momentary freak, and has not the dura- 
 bility of a rational resolve. But can they save 
 more ? When people increase their consumption 
 more saving may be required, but who will exercise 
 it ? The answer is a simple one. The people who 
 are consuming more. And it is precisely because 
 they are consuming more that they can save more. 
 This is a paradox, but unlike most paradoxes which 
 gain credence for a falsehood by tickling the ear 
 with a pointed antithesis, it contains a truth which 
 will bear the closest scrutiny. As the community 
 can only increase its consumption by increasing its 
 saving, it cannot increase its consumption without a 
 proportionate increase to its saving fund. So long 
 as there still exists any portion of Over-Supply, this 
 increase of saving is not required, but the moment 
 
OVER-PRODUCTION AND ECONOMIC CHECKS. 127 
 
 Supply is once more brought to the normal relation 
 with quantity demanded, any increase in the latter 
 requires a corresponding increase in the former, and 
 every increase in the former requires more Saving. 
 But Saving is the result of the operation of motives on 
 individuals. If people are bent on increasing as fast . 
 as possible their standard of consumption, how will 
 they be induced to save more ? In the following 
 way. As they take advantage of the lower retail 
 prices to increase their demand for Commodities, they 
 will find that prices begin to rise ; but they will also 
 find that their money incomes are rising at a more 
 rapid rate than the rise of prices, because it is not I 
 only affected proportionately by every rise of price,! I 
 but also by the increased number of times the higher \ 
 price is paid, that is by the increased number of sales. 
 Thus, every individual will find that the money value 
 of his income has risen, that he is able both to con- 
 sume more and to save more. Of course it is open 
 under such circumstances for any individual to use all 
 his increased income as demand for commodities, and 
 to save none of it ; but he will pursue this course in 
 the teeth of a constantly growing stimulus to save. 
 Saving will be easier for him, because it can be 
 effected not only without pinching, but along with an 
 increasing rate of personal consumption, and it will 
 be more advantageous for him, because it will be pro- 
 ductive of the maximum of profit. For when in- 
 creased consumption acts as a constant strain upon 
 the productive aid of capital, it has been seen that 
 each form of capital, each embodiment of saving, has 
 a full economic value, and brings the maximum return 
 of profit to its owner. If any considerable portion of 
 
128 OVER-PRODUCTION AND ECONOMIC CHECKS. 
 
 the community still persist in neglecting the oppor- 
 tunity to save, and spend all their increased money 
 incomes in demand for Commodities, they are thereby 
 increasing the possibility of effective saving for others 
 who are less extravagantly inclined, and will force the 
 latter to save a larger proportion of their incomes by 
 the incentive of a rise of profit, until the less extra- 
 vagant are induced not only to do their own share of 
 the necessary saving, but the share which the more 
 extravagant refused to do. 
 
 It must, of course, always be borne in mind that 
 so soon as all the labourers available for work are 
 fully employed, or so soon as all the natural agents 
 available for use are fully used, no further increase in 
 consumption or in capital can take place. Since 
 unused natural agents, whatever may be the case in 
 the future, exist at present in practically unlimited 
 quantities, we may exclude them from consideration. 
 The limit to which we refer will be a limit to the 
 aggregate of capital ; in a given condition of the 
 productive arts, each labourer can only efficiently co- 
 operate with a certain maximum amount of capital ; 
 if there could be brought into existence more forms 
 of capital than sufficed to furnish the maximum for 
 every labourer, the surplus must be waste. So soon, 
 therefore, as saving has accumulated this total, pro- 
 duction will be limited by the aggregate of labour 
 available for use. In this case consumption will be 
 limited by production, and can only increase if the 
 number of labourers increases, or if advances in the 
 mechanical arts enable the existing number of la- 
 bourers to effect the production of a larger quantity 
 of wealth. 
 
OVER-PRODUCTION AND ECONOMIC CHECKS. 129 
 
 This is a correct account of what would happen if 
 a whole community were to seize the opportunity of 
 a general fall of retail prices, occasioned by Over- 
 Supply, to increase the rate of consumption. It must, 
 of course, be distinctly understood that if a single 
 person, or a few persons alone in the community, 
 raise their demand for commodities, they will not 
 find their income rising with each increase in their 
 consumption, nor will they find that they can save 
 more as they spend more. The effect of their action 
 will be spread over the whole community ; so far as 
 their increased consumption increases the general 
 demand, it will operate in producing a slight rise in 
 general prices, and in the incomes of all members of 
 the community, but they themselves will reap no 
 special benefit. It is only on the assumption that 
 the community, as a whole, is incited to increase 
 its consumption that the beneficial results above 
 described will ensue. An individual who should thus 
 increase his consumption while the rest of the com- 
 munity stood firm, would, no doubt, be conferring a 
 slight public benefit, but, so far as his own interests 
 were concerned, his act would be one of private 
 extravagance. 
 
 It has been important to examine what would 
 happen if the result of a fall of retail prices were an 
 increase in the consumption of the community. But 
 it has been seen that, paying regard to the ordinary 
 motives that operate with men, there is no reason to 
 hope that a fall of retail prices, which brought with it 
 a corresponding fall in money incomes, would operate 
 in this way. 
 
 Having shown that the first economic check which 
 
 E 
 
130 OVER-PRODUCTION AND ECONOMIC CHECKS. 
 
 is supposed to prevent any evil effects of over-pro- 
 duction is entirely ineffectual, and tends rather to 
 aggravate the evil, let us pass to the second check, 
 which acts through the motive power of a fall in 
 interest or profit. 
 
 It is alleged that a fall in the profit upon existing 
 capital will remedy the evil of Under-Demand by 
 restoring the proper economic relations between 
 Production and Consumption. If people find that 
 they cannot get the usual return for the use of their 
 savings, they will not save so much, it is urged. 
 
 Now, if a fall of Profit is to induce people to save 
 less, it must operate in one of two ways, either by 
 inducing them to spend more or by inducing them to 
 produce less. 
 
 First, let us ask, will a fall in Profit increase the 
 amount of Consumption ? Let us assume, for purposes 
 of convenience, that there is an even fall in all profits. 
 How will this fact cause increased consumption ? Will 
 the Capitalist consume more ? A fall in profit means 
 to him a fall in income, and it is absurd to suppose 
 that he will be induced to increase his expenditure in 
 the teeth of a falling income. The knowledge that 
 he can get a smaller return than before for the same 
 exertion of thrift will not induce him to put on an 
 extra carriage and increase his household expenses 
 when his books show a declining income. Will the 
 working-classes consume more ? Supporters of Mr. 
 Mill's wage-fund theory would, no doubt, reply in 
 the affirmative ; each fall in profit means to them a 
 rise in wages, and they might reasonably urge that 
 the working-classes would spend their increased 
 income in raising their standard of living ; that is, in 
 increasing the aggregate of Consumption. But the 
 
OVER-PRODUCTION AND ECONOMIC CHECKS. 131 
 
 fallacy of the wages-fund has been already sufficiently 
 exposed. There is no ground for assuming that a fall 
 in profit implies a rise in wages ; on the contrary, it 
 has been seen that a fall in profit caused by the 
 existence of excessive capital is only one aspect of a 
 larger phenomenon. It was seen that Underconsump- 
 tion, acting through the agency of Over-supply, reduced 
 not the income of one class of producers, but the 
 fund from which all incomes were paid at each point 
 in the line of production ; that is to say, the aggre- 
 gate income of the community was reduced. We 
 cannot suppose that when the average rate of in- 
 comes is falling, individuals will be induced to increase 
 their rate of consumption by the fact that the premium 
 upon thrift is correspondingly diminished. 
 
 Since a fall in profit cannot reasonably be expected 
 to operate by increasing consumption, we are 
 obliged to look for its effect in diminishing produc- 
 tion. It is so far from being our intention to deny 
 that a fall of profit, due to Over-Supply, will check 
 production, that the admission of the operation of 
 this check forms the very centre of our argument. 
 We shall show in the succeeding chapters how this 
 check upon production does not imply a diminution 
 in the use of the forms of capital and labour, but 
 a wasteful use of these same forms due to a 
 derangement of the proper economic relations 
 between the amounts of capital and labour, function- 
 ing at different points in the industrial machine. In 
 the diminished production which is here adduced, as 
 the result of this economic check of a fall of profit, 
 we shall see the most pernicious form of the disease 
 called Depression in Trade. 
 
132 OVER-PRODUCTION AND ECONOMIC CHECKS. 
 
 To sum up the results arrived at in this chapter, 
 we have seen that though the community can have 
 no interest in creating a condition of general Over- 
 supply or Under-consumption, the result may be 
 brought about by the conflicting interests of individuals, 
 because, though there is a strict limit to the amount 
 of saving which a community may do in a given state 
 of general demand, there is no such limit to the 
 saving power of the individual. We have exa- 
 mined the two economic checks which are alleged 
 to be efficient preventives of any evil results which 
 might arise from an excessive rate of production. It 
 has been seen that an actual condition of Over-pro- 
 duction must exist before either of these economic 
 forces can be set in operation. The first force, that 
 of a general fall of prices, we have proved can have 
 no power to restore a right relation between produc- 
 tion and consumption. The second force, that of 
 falling profit, is seen to operate by acting as a check 
 upon production, and can only act by thus lowering 
 the source of all incomes. The fall of average income 
 thus brought about has been already identified with 
 the phenomena called Depression of Trade. It is, 
 therefore, clear that the self-acting checks on which 
 Political Economy has hitherto relied to prevent any 
 evil results which might arise from an increase of 
 production without a corresponding increase of con- 
 sumption, are unable to achieve this end. The one 
 check, that of falling prices, is entirely inoperative ; 
 the other, that of falling profit, is the immediate 
 cause of the very malady which it is supposed to 
 prevent. 
 
EXPANSION AND CONTRACTION OF TRADE. 133 
 
 CHAPTER V. 
 
 EXPANSION AND CONTRACTION OF 
 TRADE. 
 
 IN economics, where we are shut off from the possi- 
 bility of strictly scientific experiment, there are only 
 two ways of appealing to experience in attestation of 
 the validity of an argument. We may appeal to 
 statistics, and by careful collection, selection, and 
 application support and illustrate the truth we wish to 
 impress ; but the path of statistical inquiry is a 
 slippery one, and we are frequently confronted with 
 the fact of two equally competent authorities w^ith 
 the same figures at their disposal arriving at totally 
 different conclusions. The other way is to take an 
 extreme case, where the force or phenomenon whose 
 operation we are investigating assumes a quite 
 abnormal importance. History, even the history of 
 trade, sometimes affords us a striking example which 
 serves to bring out in dramatic proportion the true 
 bearings of a case, and, carefully treated, throws 
 clearer light upon the subject than the largest and 
 most reliable array of statistical facts. 
 
 In the previous chapters we have shown how an 
 
134 EXPANSION AND CONTRACTION OF TRADE. 
 
 increase or a decrease in consumption acted respec- 
 tively as a stimulus or a check to Production, and 
 we related the phenomenon of Depression in Trade 
 to the phenomenon of Under-Consumption as 
 manifested in the attempt of the community to save 
 a larger proportion of its income than was required to 
 furnish the capital necessary to maintain the desired 
 rate of production. It is now our object to illustrate 
 from the period of the Franco-German war the opera- 
 tion of a sudden large increase in consumption followed 
 .by a sudden return to a normal condition of consump- 
 tion. 
 
 From an economic point of view the Franco- 
 German war may be regarded as a sudden and enor- 
 mous increase of consumption or quantity of com- 
 modities demanded combined with a sudden and 
 enormous withdrawal of the Requisites of Production 
 from use. Not merely were the belligerent states 
 purchasers of large quantities of all kinds of produce, 
 such as food, clothing, vehicles, guns, ammunition, 
 and all the apparatus of war, but the mills, machinery, 
 and other plant in these states were compelled to 
 stand wholly or partially idle by reason of the ab- 
 straction of the labourers to serve as soldiers. 
 
 Now, the first effect of this enormous new Demand 
 of the belligerent Governments which we have to 
 note, has relation to Saving. It has been shown that 
 Saving is only effective in proportion as there is a 
 present demand for the use of the wealth which is 
 saved. To save is to create a lien or claim upon 
 future production, and one method of effecting this 
 purpose is by giving up existing commodities to others 
 to consume in the present, subject to the condition 
 
EXPANSION AND CONTRACTION OF TRADE. 135 
 
 that these ' others ' shall at any desired future time 
 return to the lender an equivalent of newly-created 
 wealth. The more, therefore, that others, able to 
 give effective liens on the future, are willing to 
 consume in the present, the more the liens that 
 can be established on the future, that is, the more 
 saving. When a thrifty saving folk can find a 
 responsible Government ready to accept enormous 
 quantities of beef, butter, shoes, coats, &c., and 
 to promise to provide the owners of them with 
 dinners, clothing, &c., through all future time, they 
 are willing to provide these commodities. The 
 method by which this Saving is effected is briefly 
 this : The thrifty saving folk habitually pay the 
 money they save into the banks ; these banks, either 
 directly or through other bankers, hand over this 
 money to the belligerent powers in the shape of a 
 loan ; the latter immediately pass on the money to 
 traders and received commodities in return. The 
 commodities thus received represent the ' Saving ' 
 which was able to be. effected because of the increased 
 demand for commodities exerted by the belligerent 
 Governments. The commodities which had been 
 paid in to the community's ' Stock ' against the ' pur- 
 chasing power ' paid to the saving folk were received 
 by the belligerent powers, and the liens or debts 
 created by these powers were received by the saving 
 folk. Under these circumstances no Over-Supply 
 could possibly accumulate. Some individual or other 
 possesses the power to purchase every commodity 
 that is offered for sale ; if he does not wish to use that 
 power he will wish to save and accumulate it ; in 
 this case he hands it over in a money shape to the 
 
136 EXPANSION AND CONTRACTION OF TRADE. 
 
 banks which are furnishing purchasing power to the 
 belligerent states; these states exercise all the pur- 
 chasing power they can get hold of as a demand for 
 commodities. Thus, no over-supply could possibly 
 exist, for whether individual producers wished to 
 consume or to save, the commodities were equally 
 demanded for consumption. Since the demand for 
 commodities must always suffice to induce their re- 
 placement by new products, and since there is no 
 limit to the quantity demanded, there is likewise no 
 limit to the amount of production other than the limit 
 imposed by the Requisites of Production themselves. 
 No matter how much was produced, no fall in price 
 could occur, for the quantity demanded w r as of neces- 
 sity always the utmost that could be supplied. 
 
 It is next important to note the results of this 
 rise in quantity demanded and the stimulus it gave 
 to production, upon the gain of those engaged in 
 productive work. 
 
 How does this desire on the part of consumers to 
 consume as much as can possibly be produced affect 
 profits ? In answering this question we have to use 
 for the first time the broad distinction between the 
 two classes of producers, the makers (producers in 
 the narrow loose sense) and the traders. What pro- 
 portion of the total value of the commodity will fall 
 to the maker, and what to the trader in the case of 
 this enlarged demand ? It is clear that everything the 
 maker can make he can find a trader to buy at the 
 current price, and everything that a trader holds he 
 can find a consumer to buy at the current price. It 
 might, therefore, appear at first sight that neither 
 maker nor trader possessed any advantage over the 
 
EXPANSION AND CONTRACTION OF TRADE 137 
 
 other. But is this so ? The maker can sell all he 
 makes, the amount each particular maker sells is only 
 limited by the absolute limits of his power to shape 
 material ; he is in no wise affected by the competition 
 of other makers, who can all likewise sell everything 
 they can make. But with the trader it is different ; he, 
 too, can sell all that he can get hold of, but the 
 amount he can get hold of is not absolutely limited 
 save by the total amount which is produced ; each 
 trader is able to dispose of as large a proportion 
 of this total as he can get into his own hands ; 
 but this amount is limited by the desire of every 
 other trader to do the same. Thus, while the 
 maker in effecting sales is not hampered by the 
 competition of other makers, the trader is hampered 
 by the continual competition of other traders seeking 
 to sell as large a share as possible of the increased 
 production to consumers. Traders will thus outbid 
 one another in purchasing from makers, raising their 
 offers to the point which leaves to them the barest 
 margin of profit for which they are willing to continue 
 their work. Paying higher prices to makers, it might 
 appear that they would be able to recoup themselves 
 by raising the prices to consumers. But if they 
 succeed in raising the prices to consumers they will 
 still be unable to keep a larger profit for themselves, 
 for the competition by which each will seek to effect 
 as many sales as possible will oblige them to offer 
 increased prices to makers, who would thus reap the 
 whole advantage of the rise. It is this power of 
 makers to secure for themselves the whole value of 
 the commodity, minus the least fraction for which 
 traders are willing to conduct their trade, at all 
 
138 EXPANSION AND CONTRACTION OF TRADE. 
 
 times when the quantity of commodities demanded 
 is the utmost that can be supplied, that accounts for 
 the rise of wholesale prices and of makers' profits 
 which occurred in the years 1871, 1872, 1873. The 
 traders wished to buy more goods than makers could 
 supply, and the only limit to the inter-competition of 
 traders was their refusal to give makers more than 
 the price they would receive from consumers. The 
 maker could, in effect, say, ' The retail price of this 
 commodity is so much ; I will allow you a bare 
 minimum of profit and no more ; if you are not con- 
 tent with that, your neighbour will be.' The trader 
 had no alternative, he must content himself with this 
 minimum of profit, or receive nothing. Makers, under 
 these circumstances, received within a fraction of the 
 whole value produced, that is to say, the money they 
 received would when exchanged by them for ' sub- 
 sistence conveniences and amusement' buy back the 
 full equivalent of the commodities produced, minus 
 the traders' least profit. Under these circumstances 
 all available capital and labour engaged itself in 
 making, all traders who were able became makers, or 
 added a ' making ' department to their trading house. 
 The number of traders tended to fall to the minimum 
 required for the work of effectively distributing goods, 
 and the productive powers of the community were 
 taxed to the utmost. Never was there a period of such 
 marked activity in production, initiated by the vast 
 increase in expenditure of the belligerent pow r ers. 
 This extreme activity was plainly visible in every 
 commercial country which had direct or indirect trade 
 relations with France or Germany. For example, it 
 is indisputable that the immense prosperity enjoyed 
 
EXPANSION AND CONTRACTION OF TRADE. 139 
 
 by English producers during the Franco-German war, 
 and for some time afterwards, must be attributed 
 directly to the prodigious waste of wealth which that 
 war occasioned. The full extent of what was meant 
 by the demand for commodities involved in this un- 
 productive expenditure of war should be clearly 
 realised. This increased demand for commodities 
 was not merely a demand that a larger amount 
 of raw material should be turned into food, guns, 
 saddles, clothes, &c., for consumption ; it was also 
 a demand which was effective in calling into ex- 
 istence new and immense quantities of machinery 
 and plant required to assist in the work of in- 
 creased production of commodities. This latter 
 fact has an important special significance, for it 
 serves to explain how it was that the wonderful 
 activity in trade did not collapse as soon as the 
 abnormal demand for commodities was remitted, 
 that is at the close of the war. A large part of 
 the saving stimulated by the increased war demand 
 found a natural investment in the construction of 
 machinery and plant to assist production and in 
 other machinery and plant to assist the production 
 of the first machinery, and so forth. The enormous 
 quantity of new plant which stood in France and 
 other European countries at the close of 1873 repre- 
 sented actual savings that had been effected during 
 the years immediately subsequent to this great war. 
 The huge war debt incurred by France, and paid in 
 the next few years, extended her war expenditure 
 considerably beyond the actual period of the war, 
 and provided a combined use for the saving and the 
 mass of forms of capital in which it had been stored. 
 
140 EXPANSION AND CONTRACTION OF TRADE. 
 
 But even when the abnormal consumption engen- 
 dered by the war declined, the full effects were not 
 felt at once, or suddenly. Even after the Govern- 
 ment had ceased to demand war supplies, and to 
 create debts which furnished investments for the 
 savings of the thrifty, and provided work for the 
 enormous increase of plant, the full-blown phe- 
 nomenon of Over-Supply was not visible at once. 
 The plant and machinery in process of construc- 
 tion was advanced step by step towards comple- 
 tion, although its use was no longer wanted, for 
 speculators had not realised the glut they were 
 creating. The impetus of saving still continued ; 
 when no investments of the old order were fea- 
 sible, there sprang up a series of bubble companies 
 which offered bogus investments and swallowed 
 up and consumed the savings of the unwary just 
 as effectually as had the war expenditure, save 
 that the paper they left in the hands of investors 
 was waste-paper instead of representing sound liens 
 upon future production. An examination of a few of 
 the prospectuses of the companies actually floated 
 in 1872 and 1873 justifies the assumption that at a 
 period when such concerns could find promoters and 
 investors, there can have been no opening for invest- 
 ment in any sort of Plant or Stock required to supply 
 the current consumption. 
 
 We have now passed through an industrial phase, 
 in which an abnormal consumption aroused the full 
 productive powers of the community, provided the 
 fullest employment for all capital and labour, and 
 stimulated the creation of w r ealth to the utmost 
 extent. We proceed to examine the further phase, 
 
EXPANSION AND CONTRACTION OF TRADE. 141 
 
 when this extraordinary consumption had ceased, and 
 the amount of capital, the rate of production, and the 
 rate of saving were all in excess of what was econo- 
 mically required to supply the amount of commodities 
 the community ] was content to consume. In order 
 to clearly understand what happened, it is best to 
 look first at the money aspect of the case. For 
 although, if we consider the community as a whole, 
 natural agents, capital and labour, are the requi- 
 sites of production, if we consider the individual, 
 money is the only requisite. With money he can 
 procure the use of plant and labour, and can pro- 
 duce what commodity he likes ; without money he 
 can do nothing. Now, look at the period of the 
 Franco-German war and the years following from 
 the point of view of the capitalist manufacturer. So 
 long as the demand for commodities continued, 
 money had been constantly and rapidly returned to 
 capitalist makers in the ordinary process of trade. 
 The portion of the income (money) of the com- 
 munity spent by each member in the purchase of 
 ' utilities and conveniences' was returned into the 
 hands of ' makers ' as a demand for the replacement 
 of retailing stock, the portion of the income that was 
 1 saved ' passed into the makers' hands by the inter- 
 vention of the lien-creating government as payment 
 for the materials of war or other commodities whose 
 consumption increased the aggregate of the quantity 
 demanded, and when these demands had ceased, 
 
 1 We have used the term community because the industrial com- 
 munity of the world is one, and the effects here described were felt 
 in a more or less degree by all European countries and the United 
 States. 
 
142 EXPANSION AND CONTRACTION OF TRADE. 
 
 it still reached capitalist makers' hands as demand for 
 the new forms of capital, i.e., machinery, ships, 
 railways, &c., which, owing to the abnormal war 
 demand, had appeared to be necessary. Thus all 
 the money distributed by capitalist makers as De- 
 mand for the Use of Requisites of Production 
 (i.e., wages, rent, profits) was constantly returned to 
 them as demand for more goods. This lasted so long 
 as the extra consumption strained to the utmost the 
 productive powers of the community. But when the 
 relaxed consumption began to exhibit a glut of the 
 different forms of capital, and saving individuals 
 began to refuse to invest their savings directly in 
 any scheme that could be suggested, but preferred 
 to retain the savings in their own hands, the capi- 
 talist maker no longer received sufficient money to 
 continue their demand for the use of the requisites 
 of production at the old rate. Individuals no longer 
 embarked their savings on their own account in the 
 work of aiding production, but paid them in to 
 banks. At first no very obvious change ensued. 
 Though capitalist makers no longer received the 
 money in the ordinary course of trade, they could 
 obtain what they wanted from bankers. Thus for 
 some little time, so long as they could offer to the 
 banks what seemed fair security for repayment, they 
 could obtain the money requisite to maintain the 
 current rate of production. But when, owing to the 
 reduction in quantity demanded, they were unable 
 to maintain their previous rate of sales, their stock 
 of goods accumulated in the warehouses constantly 
 grew, while at the same time their liabilities to the 
 banks grew correspondingly. Sooner or later a crisis 
 
EXPANSION AND CONTRACTION OF TRADE. 143 
 
 was inevitable. The moment bankers refused to con- 
 tinue increasing their loans to capitalist makers and 
 speculators, and, on the contrary, pressed for repay- 
 ment of their advances, the holders of this surplus 
 stock of goods were forced to sell at any price they / 
 could get in order to escape or postpone bankruptcy. M 
 Traders, finding that any price they chose to offer 
 was accepted, rapidly lowered their offers. The fall 
 in wholesale prices thus begun continued until the 
 profit of makers fell so low that a sufficient number 
 refused to continue making, and by ceasing to make 
 restored the equation between production and con- 
 sumption. This process of economic adjustment 
 between the rate of Production and Consumption is, 
 of course, extremely slow, and while it is going on 
 all those phenomena which indicate Depression in 
 Trade are exceptionally visible. 
 
 First, we have to note a complete reversal of the 
 previous apportionment of profits. We saw that 
 while the special demand occasioned by the war 
 operated, the productive work of makers was re- 
 warded by the whole of the commodities produced, 
 with the exception of that minimum which sufficed 
 to induce traders to continue their work of distribu- 
 tion. Now that demand is relaxed, and more is 
 being produced than is required to supply the cur- 
 rent rate of consumption, the case is very different. 
 Formerly every maker could sell all he made, and 
 no competition of his fellow-makers brought down 
 his prices. Now makers wish to sell more than 
 traders are willing to buy ; every trader can easily 
 buy as much as he wants at current prices, while 
 every trader is competing with his fellows to sell as 
 
144 EXPANSION AND CONTRACTION OF TRADE. 
 
 many of his goods as possible. The limit is no 
 longer the rate of possible production, but the rate 
 of consumption. This gives to the traders an ad- 
 vantage precisely equivalent to that which makers 
 formerly possessed. Wholesale prices fall until they 
 barely cover the cost of production, reducing the 
 profits of makers to the minimum for which they 
 will consent to continue producing, or, more strictly 
 speaking, the former rate of profit is turned into such 
 a rate of loss as will gradually operate in driving 
 a sufficient number of makers from the work of 
 making. Just as the maker was formerly able to 
 reduce the trader's profit to a minimum, so now the 
 trader is able to say to the maker : ' I will pay you 
 for your goods the bare cost of production ; if you 
 do not care to take it, I can find other makers who 
 will.' The maker has no alternative, for he has got 
 goods which he does not want, and their price, 
 money, is essential to enable him to meet his current 
 expenses. If he does not accept the trader's offer 
 he knows that other makers, still more in need of 
 money, will do so. 
 
 Thus it appears that one speedy result of such a 
 decline of wholesale prices as results from a relaxed 
 demand is the elevation of traders' profits. It is 
 true that a fall in retail prices will eventually follow 
 the fall in wholesale prices, but it will subsequently 
 be shown that this operation is a slow one. Mean- 
 while we have a period in which traders reap 
 immense profits. It is well known that in the period 
 from 1873 onward, while makers were being ruined 
 on all sides, merchants and retail tradesmen were 
 making large fortunes. 
 
EXPANSION AND CONTRACTION OF TRADE. 145 
 
 It has already been proved that the whole value of 
 the commodity produced is returned in the form of 
 profit, wages, and rent, to those who have assisted in 
 producing it. Taking the largest division of pro- 
 ducers, makers and traders, we are now able to lay 
 down the following law with regard to the portion of 
 the commodity which falls to the two classes respec- J 
 tively : ' When the rate of consumption gives full 
 employment to the existing requisites of production, 
 the makers get the whole value of the commodity, 
 less the minimum for which traders will consent to 
 continue trade. When the rate of consumption fails 
 to give full employment to the existing requisites of 
 production, the traders get the whole value of the 
 commodity, less the minimum for which makers will ; 
 consent to continue making.' This conclusion must I 
 be borne in mind when the fuller investigation of the 
 effects of an industrial crisis on the various classes of 
 producers is opened. 
 
 The rise in traders' profits and the fall in makers' 
 profits will naturally result in a gradual withdrawal 
 of capital and labour from making and its applica- 
 tion to trading. Much capital and labour cannot 
 be so withdrawn, but new savings seeking an invest- 
 ment and fresh labour entering the market will 
 employ itself in the more profitable form of trading, 
 and as much of the old capital and labour as can be 
 withdrawn will be applied to trading. Now, in con- 
 nection with this increase in the number of traders, 
 there are two important points to notice. 
 
 First. It might appear as if the increased com- 
 petition thus introduced among retailers ought to 
 operate in rapidly reducing the retail prices to cor- 
 
 E 2 
 
146 EXPANSION AND CONTRACTION OF TRADE. 
 
 respond with the reduction of wholesale prices. But 
 the fact that retail prices do not, in fact, seem to 
 respond to variations in wholesale prices has been 
 noticed by Mill, who also incidentally assigns the 
 true cause. " Retail price, the price paid by the 
 actual consumer, seems to feel very slowly and 
 imperfectly the effects of competition, and when 
 competition does exist, it often, instead of lowering 
 the prices, merely divides the gams of the high price 
 among a greater number of sellers. Hence it is 
 that of the price paid by the consumer so large a 
 proportion is absorbed by the gains of retailers, and 
 anyone who inquires into the amount which reaches 
 the hands of those \vho made the things he buys 
 will often be astonished at its smallness." (Mill, II., 
 Ch. IV., s. 3.) 
 
 As soon as the retailing ranks are swelled by 
 deserters from manufacture, and by the addition of 
 new-born labour, instead of a large and rapid reduc- 
 tion in retail prices, the old prices are for the most 
 part maintained, each trader doing, on the average, 
 a smaller business than before. It is not here main- 
 tained that no fall in retail prices eventually occurs, 
 but only that the fall is slow 7 in operating, and when 
 it does come does not correspond in extent to the 
 fall in wholesale prices. The same cause which fre- 
 quently induces fishmongers and fruiterers to destroy 
 a portion of their stock in preference to selling it at 
 reduced prices operates in regard to the whole of 
 retail trade. Traders will prefer to do a smaller 
 business, gaining a higher profit on each sale, than 
 by successful competition with their fellows to do a 
 larger business, with lower profits on each sale. But 
 
EXPANSION AND CONTRACTION OF TRADE. 147 
 
 these reasons, while they may serve to explain why 
 the fall of retail prices is slow to follow the fall in 
 wholesale prices, do not furnish a sufficient expla- 
 nation of the fact that retail prices do not eventually 
 fall in a corresponding degree with wholesale prices. 
 
 That wholesale prices fluctuate much more suddenly 
 and violently than retail prices is a well-recognised 
 industrial fact. Moreover, not only are those fluctu- 
 ations more rapid, but they represent a much larger 
 divergence from average prices. 
 
 The reasons for this comparative want of flexibility 
 in retail prices reside in the detailed conditions of 
 retail trade. If the average consumer had as intimate 
 a knowledge of all the details affecting the prices of 
 every kind of commodity he buys, as the trader has of 
 the special goods he buys from makers ; if he were 
 as keen in ascertaining and taking full advantage of 
 the slightest fall of price ; if he were absolutely inde- 
 pendent of locality ; and, most important of all, if 
 he were able to fully seize the opportunity of a fall 
 in prices to lay in a large stock of commodities, we 
 might have the same rapid and large fluctuations in 
 retail prices as in wholesale. But competition among 
 retailers is, in a large measure, confined by locality, 
 and even in that locality a slight rise or fall of any 
 tradesman's prices will but slightly affect the bulk of 
 his trade, because his customers do not compare 
 prices, even inside the limited radius, as carefully as 
 tradesmen do the prices of makers. But while the 
 consumer suffers from ignorance of prices, he suffers 
 still more from incapacity to recognise differences of 
 quality in goods. While he gives some attention, 
 at least, to rises and falls of price, as a rule he 
 
148 EXPANSION AND CONTRACTION OF TRADE. 
 
 is extremely slow to recognise the most marked 
 changes in quality. If a tradesman, instead of 
 raising his prices, substitutes inferior articles for what 
 he sold formerly, he can raise his profits without 
 running much risk of losing his custom. In short, 
 the trader is a specialist with regard to the prices and 
 qualities of the things he buys from makers ; the 
 consumer, who buys not one but every kind of thing 
 from traders, is not a specialist, and suffers accord- 
 ingly. The tradesman knows that if he lowered his 
 prices to the full extent which a fall in wholesale 
 prices would justify him in doing, he would not 
 thereby be enabled to get hold of all the trade of his 
 neighbours as would be the case in an ideal state of 
 competition. He recognises, on the contrary, that 
 such a fall of prices would not bring an increase 
 in custom sufficient to increase the profits of his 
 business. Hence, the tradesman never lowers his 
 price more than the comparatively slight competition 
 of surrounding tradesmen obliges him to do. When 
 a fall in wholesale prices has thus raised the profits 
 of retail trade, is the tradesman able to retain his 
 superior position ? No ; the higher gains of retail 
 trade, as has been said, attract fresh capital and labour 
 into that branch of production. A retail business 
 can be started more quickly, with less capital, and 
 with less knowledge, as a rule, than a wholesale or 
 manufacturing business. Hence it arises that while 
 existing makers reap the full advantage of a rise of 
 profits so long as quantity demanded equals the 
 utmost that can be supplied, any rise of retail profits 
 is quickly checked by a rapid increase of that 
 limited form of competition which acts upon retailers. 
 
EXPANSION AND CONTRACTION OF TRADE. 149 
 
 This rapid and easy increase of retailers operates in 
 this way : the newcomers establishing themselves in 
 convenient localities, not too close to their compe- 
 titors, take the current prices and try to make a cus- 
 tom for themselves out of the customers of their 
 neighbours, not trusting so much to the inducement 
 of lower prices as to other attractions and conve- 
 niences of neighbourhood, affability, shop front, adver- 
 tisements, &c. Hence it arises that, instead of 
 lowering retail prices, the competition engendered by 
 high retail gains ' merely divides the gains of the 
 high price among a greater number of sellers.' 
 
 That the retail vendor of commodities has gene- 
 rally a distinct advantage in knowledge over his 
 customers, and that the ordinary process of barter 
 and competition cannot be relied upon to determine 
 prices, is generally acknowledged. It is, indeed, this 
 truth which furnishes the reasonable basis of much 
 modern legislation. Even the strictest of the ortho- 
 dox economists would hesitate to pose as an advocate 
 of unrestricted competition in cab fares. 
 
 It is at once recognised that the purchaser is, 
 owing to the smallness of the purchase, to lack of 
 time, and to ignorance of important details, quite 
 unable to hold his own with the seller, and the State 
 steps in and protects him by special regulations. 
 Similarly, it has been found that purchasers, even 
 when poor, and with every inducement to see that 
 they get 'their money's worth,' are not merely 
 unable to judge of quality, but even of so simple a 
 matter as quantity ; and the law has, in order to pre- 
 vent grave abuses of the power which the retailer 
 possesses, to order that retailers of coal, bread, &c. 
 
150 EXPANSION AND CONTRACTION OF TRADE. 
 
 should sell by weight, and appoints inspectors to see 
 that this is actually done, and enforces penalties 
 against those who fail to observe the regulations. 
 Against fraudulent descriptions of goods we have 
 similarly a list of enactments dealing with such 
 articles as milk, butter, meat, fish, vegetables, and 
 the like, the raison d'etre of these Acts being that the 
 purchaser is not merely unable to judge whether the 
 article supplied to him is what it professes to be, but 
 even whether it is fit for human food. If, how- 
 ever, it is admitted that the purchaser does not know 
 what he is buying from the retailer, and cannot in 
 many cases even determine the quantity that he gets, 
 it is obvious that the law of competition no longer 
 applies. The purchaser can only estimate the quality 
 of goods by the price, and if a retailer lowers his 
 prices, his customers assume immediately that the 
 quality is proportionately lower. In small grocers' 
 shops it is habitual to get two or three qualities of 
 butter out of a single tub, and the purchasers of the 
 higher-priced butter never for a moment suspect that 
 the lower-priced is identical in every respect. The 
 fact that regulations of the character noticed above 
 have been passed by a representative Parliament, and 
 have hardly been resisted even by the most deter- 
 mined upholders of free competition, points irresistibly 
 to the conclusion that, in the opinion of the mass of the 
 community, the purchaser is not on terms of equality 
 with the retailer, and it necessarily follows that no 
 free competition can take place. Where, however, 
 prices are not determined by competition, custom is 
 usually the determinant. In retail prices, therefore, 
 custom reigns almost supreme, merely modified by 
 
EXPANSION AND CONTRACTION OF TRADE. 151 
 
 the slow and partial effects of competition at such 
 points and to such extent as the purchaser learns 
 something of the real value of the articles he buys. 
 
 The existence of co-operative societies, the fact that 
 wholesale dealers are also purchasers at retail prices, 
 and similar causes, slowly and imperceptibly leaven 
 the great mass of purchasers, and a corresponding 
 adjustment of retail and wholesale prices tends to be 
 produced, provided, of course, that no further varia- 
 tion in wholesale price again upsets the adjustment, 
 and leaves the slow process to be again repeated. 
 
 To the same cause, custom, we may ascribe the 
 fact that when wholesale prices are rising the retailer 
 is unable to raise his price to a corresponding degree. 
 For while the consumer is not induced to change his 
 grocer or his tailor, from the fact that A. and B., 
 another grocer and another tailor, have reduced their 
 prices, because he is apt to attribute the conduct of 
 the latter to a lowering in the quality of their goods, 
 yet if his grocer or his tailor raise their prices while 
 the prices of A. and B. remain unchanged, he will at 
 once be apt to consider that his grocer and tailor are 
 outrageous in their charges, and will forthwith trans- 
 fer his custom to A. and B. Hence we get the curious 
 conclusion that if a tradesman lowers his price twenty 
 per cent, he will not compensate his loss by the 
 increase of his sales, but if he raises his price twenty 
 per cent, his gain on each sale will be more than 
 compensated by a falling-off in sales. The average 
 consumer living, as he considers, just within his 
 income, is more affected by a rise of price than by a 
 fall. A fall of prices will not readily induce him to 
 raise his standard of living to a corresponding extent ; 
 
152 EXPANSION AND CONTRACTION OF TRADE. 
 
 a rise of prices, on the other hand, will act as an 
 almost immediate check. When men who are in 
 the habit of spending a certain number of pounds 
 a-year find a sudden considerable rise in general 
 prices, they are ready and believe themselves com- 
 pelled to reduce the aggregate of their purchases. 1 
 
 1 The fact that retail prices are not wholly competition prices, 
 and do not fluctuate with every fluctuation in the wholesale market, 
 has been universally recognised by economists. The following quo- 
 tations will serve to illustrate the fact of this recognition. It 
 should, however, be observed that economists, one and all, have 
 failed signally to recognise the important economic results which 
 attend this want of correspondence in the movement of wholesale 
 and retail prices. The critical importance of this will be mani- 
 fested in the subsequent development of our argument. 
 
 \ " On one side is the merchant, who, by frequent resort to the 
 wholesale dealer, is kept advised of the conditions of the market. 
 On the other side is the ' customer.' a creature of custom, as the 
 term implies ; often ignorant, in the widest sense of the word, unin- 
 telligent, and untrained ; always and necessarily ignorant in the 
 special sense of being unacquainted with the conditions which 
 should determine price, not knowing what a commodity ought to 
 cost, and in the case of many classes of commodities, unable to 
 judge of the quality of the goods offered ; perhaps at the mercy of 
 the dealer in the matter of the measure or weight. The merchant, 
 again, is the possessor of capital, and can wait to dispose of his goods 
 at the best time. The customer, on the other hand, is generally in 
 urgent need of commodities for immediate use, and frequently poor, 
 so that he must buy in small quantities ; perhaps even in debt, so 
 that he feels under a strong constraint to trade only with his cre- 
 ditor, who thus holds him at a double disadvantage, for how can he 
 quarrel, as to quality, measure, or price, with the man whom he is 
 not able to pay for goods already had and consumed ?" (Mr. F. A. 
 
 \ Walker, ' Pol. EC.,' 3rd ed., pp. 108, 109.) 
 
 I " The transactions " (retail) " do not take place between dealers 
 
 possessing, or with opportunities of acquiring, equal knowledge 
 respecting the commodities dealt in, but between experts on one 
 side, and on the other, persons in most cases wholly ignorant, of the 
 circumstances at the time affecting the market. Between persons 
 
EXPANSION AND CONTRACTION OF TRADE. 153 
 
 Second. It has been seen that the result of the col- 
 lapse of wholesale prices which followed the commer- 
 
 so qualified the game of exchange, if the rules be rigorously 
 enforced, is not a fair one ; and it has consequently been recognised, 
 universally in England, and very extensively among the better class 
 of retail dealers in continental countries, as a principle of commer- 
 cial morality, that the dealer should not demand from his customer 
 a higher price for his commodity than the lowest he is prepared to 
 take." (Prof. Cairnes, ' Some Leading Principles Pol. EC.,' pp. 113, 
 114.) 
 
 " Retail prices fluctuate less than wholesale prices. The reason of 
 this is that the retailer can keep his customers if he satisfies them 
 that on the whole his prices are fair. They do not watch the market 
 closely ; they do not know whether in each separate charge he has 
 made proper allowance for the fluctuations of the market. But in 
 large wholesale transactions the purchaser examines each bargain on 
 its own merits. In important transactions the higgling and bar- 
 gaining of the market are a fit occupation for business men ; but in 
 most retail transactions it is a waste of time and energy to bar- 
 gain." (Prof. Marshall, ' Economics of Industry,' Book III., Chap. 
 III., s. 9.) 
 
 ' Suppose that the services of any particular class of labourers 
 receive, on the average, a disproportionately high remuneration as 
 compared with those of other classes ; there are two ways in which 
 this excess can be reduced ; either 
 
 " (1) By lowering the price of a given quantity of the utilities 
 produced by the workers in question ; or 
 
 " (2) By increasing the number of persons competing to produce 
 such utilities, without augmenting their aggregate produce, 
 owing to the increased difficulty that each has in finding 
 customers. 
 
 " So far as this latter takes place, the effect of competition on 
 production is positively disadvantageous. 
 
 " In actual experience this effect seems to occur most conspicuously 
 in the case of services of which the purchasers are somewhat deficient 
 in commercial keenness and activity ; so that each producer thinks 
 himself likely to gain more, on the whole, by keeping up the price of 
 his services, rather than by lowering it to attract custom. 
 
 " An example of this kind is furnished by retail trade, especially 
 the retail trade of the smaller shops to which the poorer classes 
 chiefly resort ; since the remarkable success of the co-operative 
 
154 EXPANSION AND CONTRACTION OF TRADE. 
 
 cial crisis of 1873, due to the cessation of the creation 
 of new plant and raw material, induced by the ab- 
 normal war consumption, was a large and rapid in- 
 crease of the retailing class. When production was 
 stimulated to the utmost, and when everything that 
 was produced readily found consumers, the retailing 
 class was kept down to the narrowest limit sufficient 
 to distribute what was made. Now that consump- 
 tion has diminished and more can be produced than 
 can find a market, makers have become retailers, and 
 the number of retailers relatively to makers has con- 
 siderably increased. The point of importance is to 
 notice the effect which this change has brought about 
 upon the total of the commodities created, and its 
 relation to the use of requisites of production stored 
 in them. When demand was pulling tight the reins 
 of production, and capital and labour were strained 
 to the utmost endeavour, each form of capital and 
 every labourer found a full economic use stored in the 
 form of wealth which went to satisfy the large 
 demand. When the decline in demand slackened 
 the reins of production, a large amount of the capital 
 and labour engaged at each point in the productive 
 machinery became superfluous. This superfluity of 
 
 stores of artizans implies a considerable waste of shopkeepers' time 
 and labour under the system previously universal. 
 
 " But, again, the importance to each individual of finding pur- 
 chasers for his commodity also leads to a further waste, socially 
 speaking, in the expenditure incurred for the sole purpose of attain- 
 ing this result. 
 
 ' A large part of the cost of advertisements, of agents and 
 ' travellers,' of attractive shop-fronts, c., come under this head." 
 (Sidgwick, ; Prin. Pol. EC.,' Book III.. Chap. II., pp. 416, 417.) 
 
EXPANSION AND CONTRACTION OF TRADE. 155 
 
 the requisites of production was first manifested in 
 the closure of some mills and factories, in the half- 
 time or irregular working of others, and in a general 
 slackening of the activity of those engaged in making. 
 The same effect was not, however, visible in Retailing. 
 It is true that as many goods did not pass through 
 the hands of each retailer as before, when there was 
 more retailing to be done, while, on the other hand, 
 the number of retailers was constantly growing by 
 fresh accessions from the ranks of makers who had 
 failed, or were attracted by the apparent prosperity 
 of retailers. Yet all this increased body of retailers 
 appeared to be busy. The less retailing there was for 
 each one to do, the keener the competition to do as 
 much as possible. Where there was one retailer 
 before to do a given quantity of retailing, there were 
 now two. The two \vere just as busy, worked just 
 as hard as the one formerly, the extra labour being 
 swallowed up in the work of competing. This \vas 
 the era of touting and advertising. There were more 
 merchants, more agents, more shops, more shopmen 
 in each shop, all strenuously exerting themselves to 
 secure the same quantity of trade formerly conducted 
 by a smaller quantity of labour. So, too, the plant 
 of every kind engaged in assisting this trade was 
 greater than before. It is not, indeed, fair to describe 
 this increase of retailing work as absolutely wasted. 
 In so far as the extra advertising and touting assists 
 not to deceive and swindle consumers, but to enable 
 them to learn more precisely what they want and 
 where to get it ; in so far as the more numerous shops 
 and shopmen enable them more quickly and easily to 
 satisfy these wants, the extra labour must be con- 
 
156 EXPANSION AND CONTRACTION OF TRADE. 
 
 sidered to perform a service which has distinct value 
 as a commodity. If there are two attendants in a 
 shop it is obvious that customers can be more quickly 
 and efficiently served than if there is only one ; if 
 there are four the service will be better than if there 
 were two ; if there were eight, better still, and so on. 
 But it is equally clear that when a certain limit of num- 
 ber is reached, each additional hand is of less and less 
 value, and that as you increase the number you ap- 
 proach nearer to a point where any additional work 
 would only have a nominal value . Or, again, if you have 
 two grocers' shops in a particular street competing 
 for the surrounding customers, the wants of the neigh- 
 bourhood will be adequately supplied ; if two more 
 grocers open shops in the same street, dividing the 
 custom with the two previous ones, the advantage to 
 the neighbourhood will be extremely small ; in fact, 
 it might be said that the capital and labour of two of 
 the four establishments was wasted. Look at it from 
 the point of view of labour, for that of capital is less 
 important. In making an article it is not economically 
 possible that more than a certain amount of labour 
 should be used ; in every order for goods that is exe- 
 cuted the manufacturer takes care that the minimum 
 of labour shall be employed. But when articles are 
 turned out of the factory they are not fully produced 
 commodities ; the productive work of making has to 
 be supplemented by the productive work of trading. 
 Now, it appears that while there is a limit to the 
 amount of labour expended in making a certain 
 quantity of goods, there is no such limit to the labour 
 expended in advancing these goods to the position of 
 commodities, and placing them in a finished state in 
 
EXPANSION AND CONTRACTION OF TRADE. 157 
 
 the hands of consumers. Now, let us compare the 
 average productiveness of labour when a high rate of 
 consumption stimulates making and keeps the number 
 of retailers at a minimum, with the condition brought 
 about when a relaxed demand has increased the 
 number of retailers at the expense of makers. In the 
 former condition each commodity placed in the hands 
 of a consumer had packed into it the smallest quantity 
 of Uses of Requisites of Production that was possible, 
 the productive energy of the community was taxed 
 to the utmost, and the most rigid economy of labour 
 was practised. But in the other case it is quite dif- 
 ferent. Each commodity had the same amount of 
 making energy packed into it, but the amount of 
 retailing work contained in it and paid for in the 
 price was much greater than before. Looking at it 
 from the point of view of the worker, it may be 
 said that, assuming the retailing class to be already 
 adequate to distribute with fair regularity and speed 
 the goods that are made, every worker who is 
 driven out of the making business into the retailing v 
 business is driven from a more productive to a less ,9* 
 productive Use of his labour. What holds of labour ^ 
 holds to a less extent of capital and natural agents, n 
 The comparatively useless stores and shops, &c., / 
 represent a comparative waste of capital and land. 
 Thus, it may be concluded that when a high rate of 
 consumption keeps tense the productive energies of the 
 nation, there is packed in each commodity the mini- 
 mum of Use of each of the Requisites of Production, 
 and that when the rate of production tends to exceed 
 the rate of consumption, there is the maximum of use 
 of each of these Requisites of Production in each 
 
158 EXPANSION AND CONTRACTION OF TRADE. 
 
 commodity. But it has been admitted that each 
 commodity ultimately furnishes the payment for the 
 use of the Requisites of Production it contains ; that 
 is to say, that out of each commodity is paid the 
 wages, profits, rent of all those who have assisted in 
 producing it. It follows that where each commodity 
 contains a large amount of the Uses of Requisites of 
 Production, the scale of payment is proportionately 
 small. Labour, capital, land, are more valuable and 
 get larger return for their use when the smallest 
 amount of that use suffices to assist the production 
 of a commodity. In other terms, the same amount 
 of labour, capital, land, produces a greater quantity 
 of commodities when the rate of consumption is on 
 a level with the greatest possible rate of produc- 
 tion, a smaller quantity of commodities when the 
 rate of consumption is below that of possible pro- 
 duction. In short, wages, profits, rent are high when 
 consumption is high relatively to what could be pro- 
 duced, low when consumption is low relatively to 
 what could be produced. Whether the several Requi- 
 sites of Production gain equally by a rise in con- 
 sumption relative to production ; or if not, what laws 
 regulate the difference in their respective gains, are 
 questions which receive a separate investigation in 
 the next chapter. 
 
 By using as an illustration an abnormal period of 
 industrial history we have endeavoured to show how 
 a large increase in quantity demanded or consumption 
 operated in providing a full use for all the superfluous 
 capital which tended to congest the industrial body, in 
 stimulating to the utmost the productive powers of the 
 community, calling forth increased creation of wealth 
 
EXPANSION AND CONTRACTION OF TRADE. 159 
 
 and providing a use for it, and paying the highest 
 prices in the form of wages, profits, rent to the owners 
 of Requisites of Production. We have also shown 
 how, when the demand collapsed, and the rate of 
 consumption relatively to production fell, a commer- 
 cial crisis followed, causing a great dislocation of 
 trade, forms of capital being wasted, and labour 
 thrown out of employment; that afterwards there 
 was a gradual drifting of labour into retailing, which 
 swelled abnormally the number of traders, issuing in 
 a condition of depressed trade, wherein a smaller 
 quantity of commodities came to be divided as pay- 
 ment of wages, profits, rents, making a general fall 
 of income in the community. 
 
 To make the importance of this argument clearer 
 let us assume that in a healthy state of commerce 
 9-ioths of an article go to the makers and i-ioth to 
 the retailer ; we assume that the price is ten shillings, 
 then the makers receive nine shillings and the retailers 
 one shilling. Now if, owing to over-supply, the whole- 
 sale price falls to eight shillings, it is obvious that 
 makers will only receive eight shillings and the retailers 
 will receive two shillings ; under these circumstances 
 the makers only get 8-ioths of the ultimate product 
 instead of 9-ioths as formerly. Since makers derive 
 their money income exclusively from making, it is 
 obvious that this fall in wholesale prices reduces the 
 value to them of the articles they make by i-pth ; 
 that is to say, if they turn out x goods, receiving in 
 exchange y commodities, they will now receive only 
 
 2- commodities in exchange for the old total of 
 goods (#). 
 
160 EXPANSION AND CONTRACTION OF TRADE. 
 
 The same argument holds good if we assume that 
 though retail prices fall, they do not fall to the same 
 extent as wholesale ; thus, if we assume a fall of 33^ 
 per cent, in wholesale prices (less than the fall that 
 has actually taken place between' 1873 an d to-day), 
 whilst retail prices have only fallen ten per cent., 
 then the ten-shilling article will be retailed at nine 
 shillings ; but as the wholesale price of this article has 
 fallen from nine shillings to six shillings (33 J per cent.), 
 the maker will only receive 6-9ths of the ultimate 
 product instead of 9-ioths as formerly. The fall in 
 wholesale prices relatively to retail is evidently the 
 difference in the rates of fall (the difference between 
 33^ per cent, and ten per cent. = 23^ per cent.). We 
 may, therefore, for the purposes of this argument, 
 assume that retail prices are unchanged, and that 
 wholesale prices have fallen 23^ per cent. 
 
 Now, if we assume that the Requisites of Produc- 
 tion are distributed between making and retailing, in 
 accordance with the reward derived from the two 
 classes of trade, it follows that in the healthy condi- 
 tion of commerce 9-ioths of these requisites are 
 applied to making and i-ioth to retailing ; in the 
 abnormal or unhealthy state, 6-9ths making and 
 3~9ths retailing. Now, if we assumed capital to be 
 equally distributed amongst the individual members 
 of the community, we can see (assuming each maker 
 to make one article a day) that in a healthy state of 
 commerce each individual would receive 9-ioths of 
 an article daily, or, to get rid of fractions, every 
 thirty individuals would receive twenty-seven arti- 
 cles. In the unhealthy state each individual would 
 receive 6-9ths of an article, or every thirty individuals 
 
EXPANSION AND CONTRACTION OF TRADE. 161 
 
 would receive twenty articles daily. Applying these 
 figures to England, and assuming that there is no 
 variation in prices and that the annual income is 
 . 1,000,000,000, in a healthy condition of commerce 
 the annual income would be . 1,350,000,000. Since, 
 for reasons subsequently to be examined, the major 
 part of this difference would be added to labourers' 
 wages, and since such wages are estimated to amount 
 to only . 300,000,000 annually, the great import- 
 ance of variations in wholesale prices relatively to 
 retail to the working classes is sufficiently obvious. 
 We do not argue that the fall in wholesale prices 
 that has admittedly occurred does in actual fact 
 mean a fall in wholesale prices relatively to retail of 
 2 3l P er cent. ; it may mean more or it may mean 
 less, but we do insist on the enormous importance of 
 such variations, and on the fact, that would not, we 
 apprehend, be denied, that wholesale prices are lower 
 relatively to retail to-day than they were in 1873, 
 and that to this extent the working classes must be 
 injured by the fall. 
 
 It will be noticed that the increased total produced 
 in a healthy commercial state over that produced in 
 an unhealthy one does not involve the existence of 
 more labourers or more capital, but merely that the 
 old total is more effectively employed. 
 
 In concluding this chapter we wish to guard 
 against any misconception of that portion of our 
 argument which has assigned the Franco-German 
 War as a cause of commercial prosperity. War is 
 not necessarily ' good for trade' ; in a healthy com- 
 mercial condition of society, where the productive 
 energies are vigorously engaged in keeping pace 
 
 F 
 
162 EXPANSION AND CONTRACTION OF TRADE. 
 
 with a constantly growing consumption, war can be 
 nothing else than an unmitigated evil. Only where and 
 when there is a tendency towards an undue multipli- 
 cation of forms of capital through an excessive desire 
 to save, does War perform a real service to com- 
 merce by giving a temporary use to the otherwise 
 useless and excessive forms of capital. By dwelling 
 on this contingent advantage we claim to have 
 offered a more satisfactory explanation than has 
 hitherto been given of the extraordinary rapidity with 
 which national commerce appears to recover from the 
 terrible losses inflicted by long and disastrous wars. 
 We are far from advocating war as a convenient 
 remedy for commercial depression, but just as an 
 artificial mode of depletion may on occasion be useful 
 in ridding the physical body of excessive and un- 
 healthy growths, so the commercial body, swollen 
 with an undue accumulation of capital, may be 
 relieved by being thus 'let blood.' Just as men 
 who live a moderate and healthy life, neither over- 
 feeding nor over-exerting themselves, and thus main- 
 taining a true proportion between the production and 
 consumption of animal flesh and force, are only in- 
 jured by such violent and artificial modes of depletion, 
 so a nation which, while exerting its productive 
 powers to the full, is willing to raise its consumption 
 continually, so as to keep pace with the increased 
 rate of production, is in a healthy commercial condi- 
 tion, and needs no artificial outlet for its productive 
 energy. If, however, a nation or a community will 
 not consent to consume all it can produce (allowing 
 for due cautious reservations) in the ordinary ways 
 of expenditure, the congestion brought about must 
 
EXPANSION AND CONTRACTION OF TRADE. 163 
 
 vent itself in some extraordinary way, or the com- 
 munity suffers incessantly from the functional diseases 
 which such congestion brings. 
 
 It is, of course, obvious that if the community, in- 
 stead of expending its surplus accumulations in the 
 endeavour to cut its members' throats, consented to 
 increase its consumption of luxuries, or applied the 
 surplus funds to the improvement of the condition of 
 the working classes or the sanitation of its great 
 towns, all the contingent economic advantages of a 
 war would be reaped, and the direct advantage of in- 
 creased consumption of luxuries, of an improved con- 
 dition of labourers, or of sanitary towns would be 
 obtained. 
 
164 THE LAW OF THE LIMITING REQUISITE. 
 
 CHAPTER VI. 
 
 THE LAW OF THE LIMITING REQUISITE. 
 
 IN the emphasis laid by most economists upon the 
 fundamental antagonism between the interests of 
 Labour, Capital, and Natural Agents, one most im- 
 portant factor in the problem has been slighted or 
 altogether overlooked. In so far as the prime object 
 of an income is to provide utilities and conveniences 
 to its recipient, it is clear that the income of the 
 community must vary with the amount of these 
 utilities or conveniences that are produced ; that is 
 to say, must vary with the total of Commodities. If 
 a full and economical use of the Requisites of Pro- 
 duction enlarges the aggregate of production, as was 
 the case in the period of the Franco-German War, 
 the income of the Community rises ; if a more waste- 
 ful use of these Requisites of Production diminishes 
 the aggregate of production, as in the years of Depres- 
 sion subsequent to 1873, the income of the Com- 
 munity falls. It would seem naturally to follow that, 
 inasmuch as Labour, Capital, and Natural Agents co- 
 operate in the production of Commodities, they would 
 
THE LAW OF THE LIMITING REQUISITE. 165 
 
 share the gain or loss enstiant on the rise or fall of that 
 fund out of which is paid the income each of them 
 receives ; that is to say, the total of Commodities 
 produced forms a single wages-profits-rent fund, and 
 it would be reasonable to think that all those who 
 were paid for work done in common out of this com- 
 mon fund would gain by every rise and lose by every 
 fall in the amount of this fund. This identity of 
 interests has been affirmed by economic experience 
 as often as it has been denied by economic theory. 
 Those who have maintained a clash of interests 
 traceable to a fundamental law have been continually 
 brought face to face with commercial facts which give 
 them the lie. Holding that as profits rise wages fall, 
 and, vice versa, that as rent rises profits fall, and so 
 forth, they have been everywhere confronted with 
 bursts of prosperity and adversity in which the gain 
 or suffering has been shared by all three, or with 
 instances of slow and steady advances or declines of 
 commerce which seemed to affect Labour, Capital, 
 and Land in the same way and in something like the 
 same proportion. But here, as elsewhere, the com- 
 plexity in the working of commercial forces makes it 
 almost impossible to use experience so as to form 
 legitimate inductions. In dealing with any larger 
 economic subject we have not that thorough know- 
 ledge of conditions, that power of isolating pheno- 
 mena, or, in general, that large and accurate record 
 of series of facts, which are indispensable to the 
 just application of the inductive method. It is for 
 this reason that the most valuable and, rightly speak- 
 ing, the most practical work in economics has been 
 conducted on what logicians term the ' deductive 
 
166 THE LAW OF THE LIMITING REQUISITE. 
 
 method/ experience being used to verify or confute 
 the conclusions derived from the application of large 
 and universally recognised premisses. 
 
 Applying this method to our present subject of 
 inquiry, we have to ask ourselves whether the fact 
 that Wages, Profits, Rent, the sources of all individual 
 income, are paid by partition of the total amount of 
 commodities produced, is a sufficient guarantee that 
 the interests of the three are identical. If we find 
 that wages, profit, rent, do all rise with the amount 
 of Commodities, we have further to ask if all gain 
 in the same proportion. One question really underlies 
 these two inquiries, What determines the proportion 
 of the total Income which falls to Labour, Capital, 
 Land, respectively ? Now, it has been shown that 
 Wages, Profits, Rent, are in every case payment for 
 the Use of a Requisite of Production. Let us take 
 a single commodity, a pair of boots. We have seen 
 that when a pair of boots is sold to a consumer the 
 price of it is divided and given as payment to all 
 those who assist in replacing it. In so far as the 
 labourers or capitalists who have assisted to pro- 
 duce a pair of boots have been paid for their ser- 
 vices before the particular pair of boots was sold by 
 the retailer, they will none the less receive their share 
 of the money paid for this particular pair of boots as 
 profit or wages for value put into another pair of 
 boots in the ordinary course of trade, and the actual 
 amount they will receive for value imparted to the 
 second pair of boots is determined by the amount of 
 purchase-money received by the retailer for the first 
 pair For we have seen that it is the Demand of the 
 consumer and the money by which he enforces his 
 
THE LAW OF THE LIMITING REQUISITE. 167 
 
 demand that determines and provides all the money 
 incomes of those who in any way assist in producing 
 the commodity he buys. Although, therefore, as 
 a fact in commercial history, the money paid to the 
 shoe-seller may be paid over to labourers at dif- 
 ferent points as wages for labour put into other 
 pairs of shoes, it is none the less right to insist 
 that these labourers receive a portion of the value 
 of the pair of boots which has been sold by the 
 retailer. 
 
 This division and payment is obscured by the 
 complex nature of commerce, but it is an economic 
 fact. Owners of Labour, Capital, and Natural 
 Agents have all contributed to the production of 
 this pair of boots by providing the Use of a Requi- 
 site of Production. In what proportion is the value 
 of the pair of boots divided amongst them ? It will 
 be clear that this proportion depends on two con- 
 ditions : First, the amount of the Use of the Requisite 
 of Production which each has contributed ; second, the 
 market price of the use of such Requisite of Pro- 
 duction. 
 
 First. If a general improvement in bootmaking 
 machinery rendered every . 100 worth of machinery 
 able to turn out twice as many boots as before, it 
 is clear that the amount of use of machinery stored 
 in each pair of boots would be half as much as for- 
 merly. Hence, assuming a full competition, the 
 share of the value of the pair of shoes which fell to 
 the Shoe manufacturer would be half what it was 
 before. So, if by some miracle the efficiency of each 
 workman were doubled so that he could by the 
 same effort (i.e., by the same amount of use of his 
 
168 THE LA W OF THE LIMITING REQUISITE. 
 
 Requisite of Production) assist in producing twice 
 the number of boots, the proportion of each pair 
 which fell to him as wages would be half what it 
 was before. Conversely, if twice as much of the 
 use of any Requisite of Production were put in a 
 commodity, the amount returned in payment for 
 this use would be doubled. To this fact is due 
 that large difference between retail and wholesale 
 prices during periods of depressed trade. When 
 two persons give their full energies to selling 
 the same amount of goods which one person 
 sufficed to sell before, the amount of retail 
 labour represented in each article sold is twice 
 what it was before. Thus, each pair of shoes 
 sold contains twice as much use of retail 
 labour as before, and consequently a larger pro- 
 portion of the price paid by the purchaser goes 
 to retail trade. So, previously, when the sudden 
 increased Demand of the war stimulated making and 
 reduced retailing to a minimum, the amount of retail 
 labour in each commodity was very slight, and the 
 difference between wholesale and retail price was 
 very slight. But although, other things being equal, 
 the amount of Use of each particular Requisite of 
 Production stored in a commodity determines the 
 proportion which is paid to the owner of that 
 Requisite, it must be remembered that it does not 
 follow that a high rate of payment to the owner of 
 any Requisite means a high income for him. The 
 amount of his income depends on the proportion 
 he gets of each commodity he helps to produce, 
 multiplied by the number of those commodities. 
 When the total number of Commodities is much 
 
THE LAW OF THE LIMITING REQUISITE. 169 
 
 diminished, it is possible for the owner of any 
 Requisite of Production to get an increased propor- 
 tion of the value of each commodity, and at the 
 same time to receive a less aggregate income, because 
 he is not able to use his Requisite of Production 
 in assisting the production of as many Commodities 
 as he did before. 
 
 Second. But there is another consideration allied 
 closely with the preceding, another condition which 
 operates, along with the one described, to determine 
 the rate of incomes received as Wages, Profits, Rent. 
 In paying for the Use of a Requisite of Production, 
 as in every other payment, we do not always pay 
 the same price for the same amount. So the amount 
 of each Requisite of Production stored in a Com- 
 modity is not the only consideration which regulates 
 the apportionment of the Commodity among those 
 who have helped to produce it. The market price 
 of the Use of a Requisite of Production varies in 
 accordance with the same law which, acting primarily 
 on the price of Commodities, regulates the price of 
 all things which are the subject of purchases -the 
 Law of Supply and Demand. This Law applies in 
 this wise : If the Quantity of the Use of Labour or 
 Capital or Natural Agents demanded would exceed the 
 Supply at the current price, the price, Wages, Profits, or 
 Rent, rises ; if the Supply at the current price would 
 exceed the Quantity demanded, the price falls. Since 
 every increase in Consumption or Quantity of Com- 
 modities demanded is an increased quantity of the use 
 of each and all of the Requisites of Production 
 demanded, it follows that every increase in Con- 
 sumption should raise the prices of the Use of all 
 
170 THE LAW OF THE LIMITING REQUISITE. 
 
 three Requisites of Production. And this we find 
 attested beyond all doubt by the facts of commerce. 
 The increased demand of 1870-73 brought to all 
 owners of Requisites of Production higher prices as 
 payment for their use, wages were high, profits were 
 high, rent was high. And this continued as long as 
 the abnormal demand lasted. When the depression 
 set in there followed a corresponding decline of 
 wages, profits, rent. This decline was, as we have 
 seen, due to an insufficiency of consumption, or, in 
 other words, to a refusal of consumers to exert the 
 full purchasing power that they possessed. The dif- 
 ference in the rate of incomes of the Community at 
 the height of prosperity and the lowest depths of 
 the depression was exactly represented by the dif- 
 ference in the amount of Commodities produced and 
 consumed relatively to the quantity that could have 
 been produced and consumed. 
 
 But although in the period of prosperity each 
 owner of a Requisite of Production got larger pay- 
 ment because the use of his Requisite of Production 
 was embodied in a larger quantity of Commodities, 
 of each of which he received his due share, it by 
 no means follows that the respective owners of the 
 three Requisites of Production gained equally by the 
 increased demand. When an increased Demand for 
 Commodities calls for a proportionate increase of 
 Requisites of Production by raising the price for their 
 use, it does not follow that this price rises at an 
 equal rate in all three cases. What makes the differ- 
 ence is the comparative ease or difficulty of increasing 
 the Supply of each Requisite of Production respec- 
 tively. If the increased quantity of Labour or Capital 
 
THE LAW OF THE LIMITING REQUISITE. 171 
 
 can be brought into use almost as easily as the 
 quantity already in use, the price of the use of it will 
 rise but slightly ; if it is more difficult to increase 
 the quantity of Capital than of Labour the price of 
 the use of Capital will rise more quickly. The 
 comparative difficulty of increasing the quantity of 
 equally effective Natural Agents has been long re- 
 cognised as the cause of the rise of rent. When 
 the increased demand acts as a strain upon the re- 
 sources of existing Requisites of Production, the com- 
 parative tenseness of this strain is the measure of the 
 rise in price of the use of each Requisite of Produc- 
 tion. In other words, if there is one of the three 
 Requisites of Production which cannot be reproduced 
 or increased in quantity as rapidly as the other 
 two, any increase of Consumption soon makes it- 
 self felt as a strain upon this Requisite of Produc- 
 tion exclusively, and since the tenseness of the strain 
 is the measure of the rise of price, the whole rise of 
 price will be monopolised by that Requisite of Pro- 
 duction which comes alone to bear this strain. If 
 labour and capital are capable of easy and indefinite 
 increase, while Natural Agents are less expansive, 
 then the last may be said to form the barrier or limit 
 to increase in production, and the whole increase in 
 price of Commodities will be swallowed up in in- 
 creased rent. This is the assumption on w T hich the 
 disciples of Henry George base their theory. If 
 Natural Agents are practically without limit as to 
 quantity and easy access, and the growth of population 
 and the increased economy of labour due to the 
 inventiveness of man makes it easy to get fresh 
 labour, while Capital cannot be so easily increased, 
 
172 THE LAW OF THE LIMITING REQUISITE. 
 
 it is clear that Capital forms the limiting Requisite 
 of Production, and that all increase in prices will 
 eventually fall to Capital in increased Profits. This 
 is the contention of Lasalle, Karl Marx, and those 
 who hold the Iron Law of Wages. 
 
 Lastly. If Natural Agents and Capital admit of 
 
 : easy increase at a more rapid rate than Labour, the 
 
 last will form the Limiting Requisite, and swallow up 
 
 the rise of prices, that comes from increased demand, 
 
 in higher wages. 
 
 This view of the relation of the three Requisites is 
 what may be called the Law of the Limiting Requisite 
 in Production. 
 
 It often happens that a sudden large increase in 
 Consumption of some manufactured article makes itself 
 felt almost equally as a strain upon the amount of 
 Capital and of Labour already engaged in that manu- 
 facture, or readily available for such employment. 
 Then the rise of price brought about by the increased 
 Demand will cause an equal rise in the rate of wages 
 and profits. As long as it continues equally diffi- 
 cult to increase the amount of Capital and of Labour 
 in the requisite proportion which they economically 
 bear, so long will the equal strain upon the two requi- 
 sites be represented by an equal rise in wages and 
 profits. When this rise is effectual in bringing an 
 influx of new capital and new labour into the manu- 
 facture, it will generally be found that one flows in 
 more freely than the other. Suppose that the 
 labour is one which required special skill only 
 to be acquired by an expensive training and years 
 of practice, it is probable that a rise of profits 
 would speedily attract as much capital as was required, 
 
THE LAW OF THE LIMITING REQUISITE. 173 
 
 while the rise of wages would act much more tardily 
 in attracting labourers. In that case the strain which 
 had at first been felt equally by Capital and Labour 
 would subsequently fall exclusively on labour, and the 
 latter would reap the whole advantage of any further 
 rise up to the point when the height of wages would 
 induce a flow of fresh labour, which was as free as the 
 flow of capital into the new employment. 
 
 It is important to realise how this Law of the 
 Limiting Requisite acts as a determinant of the rates 
 of Wages, Profits, Rent. It is probable that when 
 three Requisites of such a diverse character are essen- 
 tial to Production, that one or other of them will 
 always, relatively to the others, be in short supply. 
 Let us turn to Manufacture, and for the moment, set- 
 ting aside considerations of rent, confine ourselves to 
 the relations of Capital and Labour. First assume 
 that production is limited by Capital, and that more 
 labour is available than is required to work the various 
 factories, railways, mines, &c., possessed by the com- 
 munity. Under these circumstances it is clear that 
 the reward of the labourer, his wages, will not depend 
 upon the gross amount of that portion of the stock of 
 commodities which falls to those engaged in Manu- 
 facture, but solely upon the competition of those 
 labourers who are out of employ. All those anxious 
 to work cannot be employed because the Capital I 
 essential to their effective labour does not exist ; these 
 surplus labourers will therefore persistently continue 
 to underbid those employed till wages have fallen to 
 such a level that the unemployed surplus refuses to 
 compete further. In all such periods, then, wages 
 will be determined by the alternative means of sub- 
 
174 THE LAW OF THE LIMITING REQUISITE. 
 
 sistence which labourers have at their disposal. If 
 these alternatives are more desirable, as in the colonies, 
 where labourers can ' squat ' or settle on unoccupied 
 land, wash for gold, &c., the minimum of wages 
 received will be relatively high. If these alternatives 
 are less desirable, as in the East, where starvation is 
 frequently the only alternative, the minimum of wages 
 will be relatively low. 1 Since wages are, in all such 
 periods, determined wholly without respect to the 
 proportion of the total of Commodities which falls to 
 Makers, and is represented by the wholesale price, it 
 is evident that in the case of any increase in this pro- 
 portion such increase will be retained by Capitalists 
 in a rise of Profits. 
 
 If, on the other hand, production is limited by 
 Labour, Capital existing in excess of the utmost 
 required to assist the work of existing labourers, a 
 section of Capitalists (those owning the unemployed or 
 partially employed forms of Capital) will be unable to 
 derive a reward, or the full reward, for the use of their 
 Capital. These owners of surplus Capital will per- 
 sistently compete for the assistance of labour (by 
 raising wages) until so nearly the whole reward for 
 production is paid to the labourers that Capitalists no 
 longer care whether their Capital is used or not. In 
 this case the labourers receive the whole of the whole- 
 sale price excepting the smallest fraction which a 
 sufficient number of Capitalists will accept in prefer- 
 ence to receiving nothing. In such a period it is 
 
 1 It is generally acknowledged that the effect which the workhouse 
 exerts on wages is very considerable ; it prevents them from being 
 driven below the point at which labour outside the House is less 
 desirable than residence within it. 
 
THE LAW OF THE LIMITING REQUISITE. 175 
 
 evident that the whole of any increase in the propor- 
 tion of the total of Commodities which falls to Makers 
 will be taken by the Labourers in higher wages. 
 Lastly, suppose Natural Agents, or, for convenience, 
 say Land, to be the Limiting Requisite. First take 
 the simplest case of a community, entirely self-con- 
 tained, occupying a country where all the good land is 
 under cultivation and well worked. What would be 
 the effect of a sudden increase in the quantity con- 
 sumed ? If we suppose there is plenty of labour 
 and capital, either not fully used or which can be 
 easily procured, of a quality equal or almost equal to 
 that in use, the strain will come upon the land. That 
 land which is already well cultivated will be worked 
 still more thoroughly with a diminishing return to 
 each portion of the fresh work applied to it, and 
 inferior land will be put into cultivation. Until 
 sufficient land has by these means been obtained to 
 assist in supplying the increased Demand, the gradual 
 rise of price occasioned by the strain upon existing 
 Supply will be entirely swallowed up by the rise of 
 rent, the payment for the use of the Limiting Requi- 
 site. Suppose that the quantity of inferior land, some 
 of which is now brought into cultivation, is practically 
 without limit, rent will not rise higher than this point, 
 that is to say, when this inferior land begins to be 
 called into use Land will cease to be the Limiting 
 Requisite. Capital or Labour will now lay down the 
 limit, and if the Demand still grows, any further rise 
 of price will be swallowed up in higher profits or 
 higher wages. Or, again, to come more nearly to 
 existing facts, suppose that unappropriated Natural 
 Agents, unlimited in quantity and of quality equal to 
 
176 THE LAW OF THE LIMITING REQUISITE. 
 
 those in use but situated in far-distant countries, can 
 be had for the asking, in case of an increased Demand 
 Land will continue to be the limiting requisite only up 
 to the point where the rise of rent is equal to the sum 
 necessary to induce the cultivation of this incon- 
 veniently situated land, and to pay for the transport 
 of the products to the place where they are required. 
 This is clearly illustrated in the development of 
 English commerce. So long as our foreign trade was 
 slight, any sudden increase in Demand for Commodi- 
 ties found the Limiting Requisite in Land ; Labour 
 and Capital were, comparatively speaking, plentiful, 
 hence the rent of land continually rose. When the 
 increased corn trade with America sprang up, agricul- 
 tural rent in England was determined by the cost of 
 producing corn in America of equal quality, plus the 
 cost of transportation, plus the amount of the duty on 
 imported corn. Now that the corn duty has been 
 abolished, cost of transport diminished, new and large 
 tracts of corn-growing country opened, the rent of 
 English agricultural land has fallen, because it is no 
 longer the requisite limiting our commercial growth. 
 Land supplies the Raw Material out of which all 
 manner of goods (including Agricultural produce) are 
 formed, and the Machinery that helps to form them ; 
 so long as it is easier to obtain increased quantities of 
 this Raw Material than it is to obtain increased 
 quantities of either Labour or Capital, Land will not 
 be a Limiting Requisite. The rent of land in or near 
 towns has risen while agricultural rents have fallen, 
 for the simple reason that convenience of position is 
 more important in the one case than the other. The 
 owner of land in a town has a monopoly, in so much 
 
THE LAW OF THE LIMITING REQUISITE. Ill 
 
 as he can obtain, in addition to agricultural rent, that 
 sum which competing tradesmen or other occupants 
 are willing to pay in order that their factory or house 
 may be in the centre of a large population, in pre- 
 ference to building it on land to be obtained outside a 
 town at the agricultural rate. 
 
 If we look more in detail at commercial experience 
 we shall find that the strain caused by an increase in 
 consumption does not necessarily disclose at once 
 the ultimate Limiting Requisite, but that at different 
 stages of any such period each of the three Re- 
 quisites may, in turn, form for a time the Limiting 
 Requisite, may feel the tenseness of the strain, 
 and may reap the reward of this pressure in an 
 increased rate of payment. Reverting once more to 
 the Franco-German War, let us note the order in 
 which the strain was felt. As soon as Consumption 
 (including the war waste) tended to exceed the utmost 
 which Makers could replace, we saw that Makers 
 received within a fraction of the whole value produced. 
 But this did not show itself in an immediate and 
 equivalent rise in the wages, profits, and rent of those 
 who owned the Requisites of Production. 
 
 The first to reap the advantage was the Capitalist ; 
 profits rose enormously, while wages did not im- ' 
 mediately rise to any considerable extent. Since the 
 whole, or nearly the whole, of the enhanced wholesale 
 price was retained by the Capitalist in a higher rate 
 of profits, we may safely conclude that Capital at first 
 formed the Limiting Requisite, and that there was in; 
 existence an unemployed surplus of labour which 
 could be obtained for the same, or nearly the same, 
 price as that received by labourers already in employ- 
 
 F 2 
 
178 THE LAW OF THE LIMITING REQUISITE. 
 
 ment. It must be remembered that in tracing the 
 commercial effects of the Franco-German War we are 
 not looking so much at the belligerent countries them- 
 selves, as at the effects produced in England and other 
 non-belligerent portions of the trading community. 
 Capital figured as the one limiting requisite at the 
 beginning of the increase in quantity demanded. So 
 soon, however, as the labour demanded to construct 
 fresh Plant, together with that demanded to work the 
 fresh Plant, had absorbed the unemployed surplus of 
 labourers, and all existing labour power obtained the 
 fullest use, Capital no longer figured as the Limiting 
 Requisite. Labour found itself in that position, and 
 wages began to rise rapidly, moving towards that 
 point when labourers would receive in wages the 
 whole of the ultimate produce, less a minimum com- 
 mission to retailers, and the minimum profit which 
 Capitalists would consent to receive in preference to 
 allowing their capital to stand idle. Before that 
 point was reached, however, the decrease in quantity 
 demanded, and consequent panic of 1873, brought 
 about a collapse in prices the effects of which have 
 already been noticed. If the war-rate of Consumption 
 had continued or increased there is every reason to 
 believe that labour would have continued to be the 
 limiting requisite, and that wages would have reached 
 and maintained a level far higher than that which 
 they actually attained. 
 
 When the actual forms of Capital are considered, it 
 is obvious that Capital does not possess that fluidity, 
 or applicability to various purposes, assumed for it 
 by economists. Thus a particular form of Capital, say 
 a sewing machine, can only be applied to aid the pro- 
 
UNIVERSITY j 
 
 THE LAW OF TJ&^LIM1TL\<; REQUISITE. 179 
 
 duction of clothing ; or a particular form of Capital, 
 raw cotton, can only be applied to the production of 
 a particular class of commodities, and that class alone. 
 There is in actual fact no fluidity whatever in forms 
 of Capital ; the general impression of fluidity which 
 Capital gives being due, in part, to the rapidity with 
 which new forms can be created, and in part to the 
 facility with which individuals can exchange with each 
 other the particular forms they own. 
 
 In dealing with the Franco-German War period 
 we have seen how the increase in the quantity of par- 
 ticular classes of commodities demanded raised prices 
 and profits, causing particular fclasses of forms of 
 Capital to be the Requisites of Production limiting 
 Industry. We have also seen how the desire to gain 
 these high profits led saving individuals to demand the 
 creation of these highly remunerated forms of Capital, 
 and by so doing to continuously widen the circle of 
 Requisites of Production which experienced the in- 
 creased demand ; and we have seen that the general 
 rise in wages which marked 1872 and 1873 was due 
 to the fact that the quantity of labour demanded : 
 (a) to work the Capital actually in existence (b) to 
 create new Capital (open mines, reclaim land, con- 
 struct railways, &c., &c.), exceeded the supply offered 
 at the current price. 
 
 Though, therefore, certain special forms of capital 
 held at the outset the position of limiting Requisite, 
 this position was soon lost by Capital and gained by 
 Labour, and had the quantity of Commodities de- 
 manded still reached the total economically desirable, 
 the labourers would have been the Requisite of 
 Production limiting Industry. They could then 
 
180 THE LAW OF THE LIMITING REQUISITE. 
 
 have dictated their own terms to the owners of 
 Capital, terms limited only by the necessity that 
 wages must not exceed the whole of the ultimate 
 product, but must afford a margin of gain to the 
 Capitalist sufficient to induce him to apply his Capital 
 to aid production in preference to leaving it idle and 
 receiving nothing. 1 So soon, however, as Production is 
 limited, not by the total of any one or other of the 
 Requisites of Production available for use, but by the 
 aggregate that consumers will consent to buy and 
 consume, there is no Requisite of Production which 
 limits Industry. Surplus Labour, Capital, and Natural 
 Agents exist, and the rates of wages, interest and 
 profit, and rent are determined at the point at which 
 a sufficiency, and no more, of each of these Requisites 
 is offered for use, a point so low that the owners of 
 the unused Labour, Capital, and Natural Agents no 
 longer compete with those actually employed. The 
 most efficient labourers, the most skilfully manipu- 
 lated Capital, and the best Natural Agents are alone 
 used ; the less efficient Labour, Capital, and Natural 
 Agents are an unused Surplus, and their owners must 
 subsist otherwise than on these surplus and unused 
 Requisites. 
 
 Since the experience of 1870, 1871, 1872, and 1873 
 has shown that Capital and Natural Agents would 
 not, in the present state of society, be able to long 
 maintain the position of limiting Requisites, it is 
 obvious that a period of Depression in Trade does 
 not materially injure their owners, though it is true 
 
 1 Their position relatively to natural agents would have been that 
 usually ascribed to them by economists, following the principle set 
 forth in Kicardo s law of rent. 
 
THE LAW OF THE LIMITING REQUISITE. 181 
 
 that if more Production were effected, more Capital 
 and more Natural Agents would be used. But even 
 in this latter case the rate of reward obtainable on 
 any given total of Natural Agents or Capital would 
 not presumably be largely affected for more than a 
 very short period. Labour, however, is affected, 
 and disastrously affected, by insufficiency in the 
 quantity demanded. From being the Requisite of 
 Production, limiting industry and receiving in conse- , 
 quence within a fraction of the whole of the ultimate \ 
 product, it becomes a non-limiting Requisite, and 
 receives the smallest fraction of the ultimate product 
 which a section of its owners will accept in preference 
 to receiving nothing and remaining idle. 
 
 Or, to state it otherwise, the limiting Requisite 
 suffers from no competition ;. the quantity of its use 
 that would be demanded is necessarily always in 
 excess of the quantity offered, and, as a consequence, 
 its owners have no need to compete with each other. 
 When Labour is the limiting Requisite, the one limit 
 to wages is the whole of the ultimate product, less 
 certain minimum deductions. So soon, however, as 
 Industry is restricted by reason of insufficient con- 
 sumption, labourers are thrown out of work, and the 
 rate of wages is fixed at the point at which even 
 unemployed labourers cease to compete further ; and, 
 as we have seen, this point is determined wholly 
 irrespective of the more or less of the ultimate 
 product, and exclusively by the more or less desirable 
 alternative methods of subsistence open to this un- 
 employed surplus. 1 
 
 1 See page 178. 
 
182 THE LAW OF THE LIMITING REQUISITE. 
 
 We are thus able to understand why all the 
 modern improvements in machinery and the me- 
 thods of production have failed to lighten the day's 
 work of the labourer, or to have materially in- 
 creased his control of subsistence, conveniences, and 
 amusement. 
 
 The labourers' wages are determined in all periods 
 of insufficient demand by the iron law, which says 
 that, of the labourers able and willing to work, a 
 section shall not work, and that those who work 
 shall receive wages so low that those out of work 
 would refuse to accept them. Wages, under these 
 circumstances, are determined at the lowest con- 
 ceivable point, and, so long as quantity demanded is 
 insufficient, wages must remain there. The labourers, 
 therefore, are the chief sufferers from the saving 
 habits of the rich, and, in so far as evil proceeds from 
 poverty, the highly-extolled virtues of thrift, par- 
 simony, and saving are the cause. 
 
 In concluding, it may be well to sum up briefly the 
 argument by which excessive Thrift has been thus 
 related to Depression in Trade. 
 
 All money received by individuals in a commercial 
 community is received as payment for the Use of 
 Natural Agents, or Capital, or Labour engaged in 
 forwarding the production of Commodities. A cer- 
 tain portion of this money must constantly be applied 
 to replace the machinery and goods engaged in pro- 
 duction at different points in the industrial machine, 
 so as to maintain the present rate of production. So 
 far as individuals fail to perform this task, and instead 
 use the money in buying commodities, they are 
 rightly described as living on their capital. All the 
 
THE LAW OF THE LIMITING REQUISITE. 183 
 
 rest of the money received, after the necessary de- 
 duction is made, is the money income. This money 
 income may be employed either in acquiring posses- 
 sion of Commodities for personal consumption, or a 
 portion only may be used in this way, while the rest 
 is employed in obtaining possession of Plant, Ma- 
 chinery, and Raw Material, so as to produce a new 
 set of Commodities in excess of that produced before. 
 But though any individual may spend any proportion 
 of his income in this last way, which is called Saving, 
 the community, as a whole, can only spend a certain 
 proportion of its income thus with advantage. For 
 the utility of thus saving a portion of its income 
 depends upon its willingness to spend another portion 
 in buying for consumption the increased stock of 
 Commodities which this ' Saved income ' is engaged 
 in producing. Thus the community can effect no 
 useful end by saving and putting into the forms of 
 capital a larger proportion of its income than is re- 
 quired to assist in producing what it is willing to 
 purchase and consume with the other portion of its 
 income. Yet we have seen that there is a force, 
 namely, the individual desire of accumulation, which 
 may impel a community, through the action of its indi- 
 vidual members, to save a larger proportion of its 
 income than is desirable. We have further seen 
 that the increase of production thus brought about 
 has no natural power to force such an increased 
 consumption in the future as shall justify this 
 apparent excess of saving by providing a fresh 
 demand for the products which it assists to create. 
 Thus the Over-Production engendered by exces- 
 sive thrift can only be cured by a decline in the 
 
184 THE LAW OF THE LIMITING REQUISITE. 
 
 rate of production slowly brought about by a fall 
 in profits. Such a decline in rate of production 
 throws out of employment a portion of existing 
 forms of capital, a portion of the natural agents 
 formerly in use, and a number of labourers whose 
 labour has no longer any use. Thus the incomes of 
 the owners of all these requisites of production is 
 diminished ; that is, Rent, Wages, Profits fall, and 
 we reach that industrial condition described as De- 
 pression of Trade. 
 
 In this Depression the owners of that Requisite 
 which would otherwise have been the Requisite 
 limiting Production suffer most severely. We have 
 seen that the experience of the Franco-German War 
 period conclusively shows that at the present period 
 this Requisite would be Labour, and it is, therefore, 
 the Labourers who have most to lose by the economic 
 evils resulting from the excessive desire to amass for- 
 tunes. 
 
 Before quitting this subject we may just explain 
 the apparent paradox, that while any individual can 
 always save by reducing his consumption, the com- 
 munity, as a whole, cannot do so. The explanation 
 is this : The reduction in consumption caused by the 
 saving of the thrifty reduces all incomes, and this 
 reduction of all incomes continuously proceeds until 
 the least thrifty section of the community ceases to 
 live on its incomes and begins to spend its Capital. 
 So soon as this occurs an unlimited field of invest- 
 ment is opened to the thrifty. The forms of Capital 
 previously owned by these ' extravagant ' folk are 
 purchased by the saving individuals, and form excel- 
 lent investments for their savings. Since it is always 
 
THE LAW OF THE LIMITING REQUISITE. 185 
 
 possible for any individual to be more thrifty than his 
 neighbours, it is always possible for an individual to 
 save. It is quite true that such saving is not a saving 
 as regards the whole community; but it does not 
 matter to the accumulator of a fortune whether his 
 fortune is an addition to the aggregate wealth of the 
 community, or whether it is embodied in the forms 
 previously belonging to other individuals, whom, by 
 his saving operations, he has forced to live on their 
 Capital. To make the operation of this law clearer, 
 we will take the simplest possible case that of a 
 number of peasant proprietors paying a fixed money 
 tax either to the State or to Landlords. Undue thrift 
 in such a case would accumulate a surplus of all sorts 
 of farm produce, and consequently prices would con- 
 tinuously fall ; sooner or later the less thrifty of the 
 peasants would be unable to provide the constantly 
 increasing amounts of farm produce that would have 
 to be sold to meet their fixed money payments ; so 
 soon as this occurred they would have to borrow 
 from their more thrifty neighbours, and little by little 
 the saving operations of these thrifty folk would 
 eject them from their holdings, and reduce them to 
 the position of labourers or tramps. 
 
186 SCARCITY OF GOLD AS AN ECONOMIC FACTOR. 
 
 CHAPTER VII. 
 
 SCARCITY OF GOLD AS AN ECONOMIC 
 FACTOR. 
 
 IT is asserted by economists of the currency school 
 that price changes are induced by changes in the in- 
 herent value of gold, and that these price changes are 
 the cause of depression in trade. ,We purpose in this 
 chapter to ascertain whether there is any foundation 
 for this contention in the facts, figures, and arguments 
 on which and by which it is supported. 
 
 The arguments of this school are two in number : 
 the first, that gold is scarce, and that this scarcity en- 
 hances its value ; the second, that the cost of pro- 
 ducing gold has risen, and that consequently the value 
 of all the gold in existence has correspondingly risen. 
 Taking the first of these contentions, we will en- 
 deavour to see whether scarcity of gold and low prices, 
 and a plethora of gold and high prices, are, in actual 
 fact, simultaneous phenomena. 
 
 At the outset of the inquiry, however, we must 
 brush away any lingering traces of the old mercantile 
 theory, which asserts that purchasing power, the 
 power to purchase 'subsistence, conveniences, and 
 amusement ' inheres in gold. ' Purchasing power,' says 
 Professor Cairnes, and no one, we believe, would 
 dispute this statement, ' owes its existence to the 
 
SCARCITY OF GOLD AS AN ECONOMIC FA CTOR. 187 
 
 production of a commodity, and, the conditions of in- 
 dustry being given, can only be increased by increasing 
 the quantity of commodities offered for sale.' For 
 instance, when a doctor is said to make ..1,500 a 
 year, it means that he gives professional advice, &c., 
 which he exchanges with his patients for that sum. 
 When he goes into a shop and buys any article, he 
 really pays for it by the professional services he has 
 previously rendered some other individual. He, 
 every year, produces professional services valued at 
 .1,500, and he, every year, receives commodities 
 valued at .1,500 a year ; or, if he prefers it, he, in- 
 stead of taking his whole income in commodities, may 
 take part in capital, and thus ' save for future ad- 
 vantage.' The value of his services temporarily 
 stored up in coins, or in a banker's credit, he transfers 
 to the sellers of s^ich articles as he desires ; in other 
 words, he spends or exerts the purchasing power he 
 has created. Similarly, the incomes of all other in- 
 dividuals (excluding gold miners) can invariably be 
 shown to be derived from production, the money being 
 merely the cart or vehicle which conveys this purchas- 
 ing power from its producers to the particular fraction 
 of supply on which they desire to exert it as a demand. 
 This carting or conveyance of purchasing power 
 from one individual to another is the only use of 
 currency. It is for this purpose, and this alone, that 
 banks, with all their apparatus of bills and cheques, 
 and drafts and acceptances, &c., &c., exist. It is for 
 this purpose, and this alone, that governments mint 
 the gold and silver into coins. It is for this purpose, 
 and this alone, that the national banks store up the 
 great masses of bullion which they call reserves. 
 
188 SCARCITY OF GOLD AS AN ECONOMIC FACTOR. 
 
 The one object of production being to get useful 
 and convenient things into the hands of consumers, 
 money assists the process in the following way. 
 When an individual has produced a useful or con- 
 venient thing which he does not want to consume 
 himself, money enables the community to enjoy the 
 consumption of it at once, without waiting for the 
 producer to find some one else who wants the article, 
 and who at the same time has in his possession some- 
 thing else which the first-mentioned individual desires 
 to have. To prevent the delay and trouble of a 
 system of direct barter, it is arranged that when a 
 person has produced anything he shall give it up to 
 the use of any other member of the community who 
 shall give him a guarantee, which shall enable him, at 
 any future time, to obtain from some other person 
 that which he would be willing to take in exchange 
 for what he has sold. Money, then, assists in convey- 
 ing ownership by means of a system of guarantees. 
 Products are still exchanged for products, but by 
 means of money each exchanging party is able to get 
 the equivalent of the product he offers in any form 
 and at any time, instead of taking it in one form and 
 at the time when some one else desires it, who has 
 something he wants. Products possess purchasing 
 power, but w r hen this power exists in a special form 
 it is not fully and easily operative. The sale of a 
 product for money is, on the part of the seller, the 
 exchange of a special form of purchasing power for a 
 general form of purchasing power, conveyed in the 
 form of that token called money. The service ren- 
 dered the community by money is, therefore, though 
 of great importance, of a strictly limited character. It 
 
SCARCITY OF GOLD AS AN ECONOMIC FA CTOR. 189 
 
 facilitates exchanges, enabling the clumsy and tedious 
 system of direct barter to be replaced by the easy and 
 convenient system of indirect barter, i.e., selling for 
 money and purchasing with money. It must, how- 
 ever, never be forgotten that this money system is 
 only an elaborated barter system. Products still 
 exchange for products, though the exchange is not 
 direct, but consists of products for money and money 
 for products. Money, while it obscures, in no wise 
 changes the facts of barter, and its use is limited to 
 the aid it gives to the exchange of commodities. 
 
 It is next necessary to ascertain whether gold is, as 
 alleged by the Bimetallists, scarce. For this purpose 
 we will first consider what is the meaning of the 
 term < demand for money.' We have seen (Chapter 
 III.) that the only demand which the community can 
 exert is a demand for consumable articles by con- 
 sumers, all other so called demands being resolvable, 
 when regarded from the community's point of view, 
 into mere changes in individual ownership. Currency, 
 therefore, cannot be demanded ; the community 
 possesses exactly the same number of sovereigns 
 whether any given sovereign is in the pocket of A. or 
 B., or C., or in the cellars of the Bank of England. 
 What, then, is meant by ' demand for money ' ? The 
 answer is plain ; it is a demand for the use of money. 
 Just as we showed that what is commonly but erro- 
 neously called demand for capital is really a demand 
 for the use of capital, so we now see that the so-called 
 demand for money is a demand for the use of money. 
 Banks sell the use of money and they purchase the 
 use of money ; the price of this use they term the 
 rate of discount (or more usually Bank rate). Now, 
 applying our law of price, we can see that if the 
 
190 SCARCITY OF GOLD AS AN ECONOMIC FACTOR. 
 
 quantity of this use demanded increases relatively to 
 the supply, Bank rate rises ; if the quantity of this use 
 demanded decreases relatively to the supply, Bank 
 rate falls. The correspondence of Bank rate, or the 
 price of the use of money, with variations in the 
 quantity of the use of gold currency demanded 
 relatively to the supply available, is well illustrated by 
 the following table, taken from Mr. Giffen's ' Essays 
 in Finance :' 
 
 Keserve in Millions Sterling. 
 
 Year. 
 
 
 Rate 
 of 
 Discount. 
 
 Above 
 Average. 
 
 Below 
 Average. 
 
 
 
 
 . s. d. 
 
 1872 - 
 
 
 
 12-1 
 
 420 
 
 1873 - 
 
 
 
 12-0 
 
 4 15 10 
 
 1874 - 
 
 
 
 11-0 
 
 3 14 1 
 
 1875 - 
 
 
 
 11-5 
 
 348 
 
 1876 - 
 
 15-9 
 
 
 
 2 12 1 
 
 1877 - 
 
 
 
 12-4 
 
 2 18 
 
 1878 - 
 
 
 
 10-8 
 
 3 15 8 
 
 1879 - 
 
 18-4 
 
 
 
 276 
 
 1880 - 
 
 16-0 
 
 
 
 2 15 
 
 1881 - 
 
 13-7 
 
 
 
 3 10 
 
 1882 - 
 
 
 
 11-8 
 
 426 
 
 1883 - 
 
 
 
 12-4 
 
 3 11 3 
 
 1884 - 
 
 
 
 13-3 
 
 2 19 
 
 A comparison with earlier figures adduced by Mr. 
 Giffen serves most strongly to emphasise the point 
 which the figures above sufficiently indicate, that 
 during the years of Scarcity of Gold, when the Bank 
 Reserve has been abnormally low, the rate of dis- 
 count has been high ; and that within this period the 
 rate of discount has generally varied inversely with 
 the amount of the Reserve. It may be observed that 
 exact correspondence between rate of discount and 
 
SCARCITY OF GOLD AS AN ECONOMIC FACTOR. 191 
 
 amount of Reserve is not to be expected, for the 
 former is strictly determined by the risk attending 
 loans, and this risk is determined not exclusively by 
 the condition of the Bank Reserve, but is also 
 affected by considerations which relate to the general 
 condition of trade and the average credit of bor- 
 rowers. But the main fact that scarcity of Gold 
 currency raises the rate of discount is clearly estab- 
 lished. 
 
 Now, the only ground on which it appears pos- 
 sible to argue that gold is scarce, is on the assump- 
 tion that the quantity of gold available for use as 
 currency is less than the quantity which it is desirable 
 should be so available. Gold currency is obviously 
 of no use unless used, and a ' scarcity ' of gold must 
 mean that there is a lack or insufficiency of gold 
 for currency purposes. The ' scarcity' of gold, 
 therefore, which the Bimetallists and others argue 
 is the cause of the present low range of prices and 
 Depression in Trade, can only mean that the quantity 
 of gold currency available for use is less than the quan- 
 tity of gold currency which it is desirable should 
 be available for use. If this 'scarcity' is the cause 
 of low prices, the converse must be equally true, 
 and high prices must be caused by a relative plethora 
 of gold currency. We have already seen that the 
 Bank rate of discount is the price of the use of gold 
 currency, and, reverting to our law of price, we can 
 assert that if the quantity of this use demanded in- 
 creases relatively to the supply available (if, in short, 
 gold is scarce), Bank rate must rise ; if, on the other 
 hand, the quantity of this use demanded decreases 
 relatively to the supply, Bank rate must fall. 
 ' Scarcity/ therefore, will be accurately gauged by 
 
192 SCA RCITY OF GOLD AS AN ECONOMIC FA CTOR. 
 
 Bank rate ; if gold currency is relatively scarce, Bank 
 rate will be high ; if it be relatively plentiful, Bank 
 rate will be low. To ascertain whether low prices 
 and scarce gold, and high prices and plentiful gold, are, 
 as the Bimetallists and others urge, interdependent 
 phenomena, we will again borrow from Mr. Giffen, the 
 most influential exponent of this doctrine, and show 
 by his own figures that, on the contrary, scarce gold 
 and high prices, and plentiful gold and low prices, are 
 in actual fact invariably co-existent : 
 
 Year. 
 
 Index No. 
 
 Bank Reserve 
 
 in Millions 
 
 Sterling. 
 
 Rate 
 
 of 
 Discount. 
 
 1865 
 1866 
 1S7 
 1868 
 1869 
 1870 
 1871 
 1872 
 1873 
 1874 
 1875 
 1876 
 1877 
 1878 
 1879 
 1880 
 1881 
 1882 
 1883 
 1884 
 
 3575- 
 
 3564- 
 
 3024 . 
 
 2682 , 
 
 2662 
 
 2689 
 
 2590 
 
 2835- 
 
 2947- 
 
 2891 
 
 2778 
 
 2711 
 
 2715 
 
 2554 
 
 2202 
 
 2538 , 
 
 2376 
 
 2435- 
 
 2342 
 
 2221 
 
 8-0- 
 
 6-7- 
 12-9 
 11-9 
 10-3 
 12-4 
 14-1 
 12-1 
 
 12-0 
 
 11-0 
 11-5 
 
 15-9 
 
 12-4 
 10-8 
 
 18-4 
 
 16-0 
 
 13-7 
 
 11-8 
 
 12-4 
 13-3 
 
 . s. d. 
 4 15 4 
 
 6 19 
 2 10 9 
 2 1 11 
 342 
 320 
 
 2 17 8 
 420 
 4 15 10 
 
 3 14 1 
 3 4 
 
 2 12 
 
 2 18 
 
 3 15 
 2 7 
 
 2 15 
 
 3 10 
 
 4 2 
 3 11 
 2 19 
 
SCARCITY OF GOLD AS AN ECONOMIC FA CTOR. 193 
 
 The column of Index Numbers represents the con- 
 dition of general prices, and is obtained by taking 
 averages of the prices of representative products 
 during the year. The other columns require no 
 explanation. The black line is drawn to denote years 
 in which the rate of discount is above . 4. It will 
 here be seen that the high rate of discount has in 
 every case co-existed with a higher price level than 
 in the neighbouring years of low discount. The 
 dotted lines denote years in which the bank reserve 
 averaged above fourteen millions ; in three cases out of 
 four prices were lowest when bank reserve was 
 highest. The five years of highest bank-rate (average 
 of five years, .4 iSs. nd.) give a price level of 
 3,071, while the six years of lowest bank-rate (average 
 of six years, .2 IQS. gd.) give a price level of 2,624. 
 The bank reserve during these same years averages 
 14*8 for the price level of 2,624 and 10*2 for the price 
 level of 3,071. 
 
 In the face of facts like these, can it be argued that 
 insufficiency of gold causes low prices ? or, that 
 plethora of gold causes high prices ? or, that high 
 rate of discount lowers prices, while low rate raises 
 them ? Mr. Giffen appears to be partly aware that his 
 figures do not adequately support his theory, and en- 
 deavours to argue that the effect of a fall in discount 
 will not be felt immediately on prices ; a rise of dis- 
 count to-day to ten per cent, would not, he contends, 
 cause me and other traders to take lower prices to-day, 
 but to take lower prices next year, or in two or three 
 years' time, when the rate of discount has, perhaps, 
 fallen to two per cent. But this extraordinary conten- 
 tion is, we take it, only the result of Mr. Giffen finding 
 
 G 
 
194 SCARCITY OF GOLD AS AN ECONOMIC FA CTOR. 
 
 that his figures do not tally with his theory. If he had 
 found low prices actually coincident with high rates of 
 discount and the converse, we should have heard 
 nothing of any reason why the effects should be post- 
 poned. Any impartial examiner of the figures we 
 have quoted will come to the conclusion that scarcity 
 of gold and high rates of discount are not the cause 
 of low prices. 1 
 
 We have seen that the only demand which can be 
 exerted for gold currency is a demand for its use, and 
 that the price of this use falls when other prices fall, 
 ,and rises when other prices rise. The reason is obvious ; 
 gold is a mere tool, or machine, to aid and facilitate 
 the work of production, and the same cause which 
 depresses the prices paid for the uses of the other 
 requisites of production, depresses the price paid for 
 the use of currency. We are not here dealing with 
 the very involved problem of how the normal rate 
 of interest is determined, but merely with those 
 temporary fluctuations on which the Bimetallists rely 
 for an explanation both of depression in trade and low 
 prices. 
 
 We have next to consider the second theory 
 advanced by the Bimetallists, that the cost of pro- 
 ducing gold has increased, and that consequently the 
 value of all the gold in existence has risen. They 
 
 1 Since this was written, Mr. Giffen has receded from the position 
 taken by him in his " Essays on Finance ;" he now asserts the conclu- 
 sion to which our argument leads, i.e. : " There is a relation between 
 the quantity of money and prices, but it is rather one in which prices 
 assist in determining the quantity of the precious metals to be used 
 as money, and not one in which prices are themselves determined by 
 that quantity." " A Problem in Money." Mr. Giffen, " Nineteenth 
 Century,*' November 1889. 
 
SCARCITY OF GOLD AS AN ECONOMIC FACTOR. 195 
 
 argue in this wise : the cost of producing the most 
 expensively-grown wheat required to supply the 
 " last margin of consumption " determines the price 
 of wheat. They then apply this argument to cur- 
 rency gold, without, however, perceiving that its 
 validity rests exclusively on the assumption that the 
 most expensively produced gold is required " to supply 
 the last margin of consumption." Now, we have seen 
 that currency gold is not consumed ; all that is con- 
 sumed is its use, and so far is it from the fact that this 
 most expensively produced gold is required for use, 
 i.e., is required " to supply the last margin of corn- 
 sumption," that, on the contrary, gold currency has 
 been persistently more abundant relatively to the 
 quantity required for use, during the years marked 
 by low prices and Depression in Trade than during 
 the years marked by high prices," and a " prosperity 
 advancing by leaps and bounds." The most expen- 
 sively produced gold has not, therefore, been pro- 
 duced, as the Bimetallists fondly imagine, to supply 
 the "last margin of consumption," but has been 
 produced to lie idle in the vaults of the great national 
 banks, and the cost of producing it has, therefore, 
 had nothing to do with the value of gold. 
 
 While, however, the cost of producing gold does 
 not determine prices, prices do determine the cost of 
 producing gold. For instance, if the product of the 
 use of certain capital and labour sells for one ounce 
 weight of gold, and if similar totals of the use of 
 capital and labour applied to crushing quartz yielding 
 one ounce of gold to the ton of stone would produce 
 one ounce of gold in the same time and with the 
 same effort, then it will be indifferent to the capi- 
 
196 SCARCITY OF GOLD AS AN ECONOMIC FACTOR. 
 
 talist and labourers whether they crush quartz or 
 produce commodities. In either case they obtain 
 equal totals of gold, and consequently of general 
 purchasing power. If, however, general prices fall 
 to one-half, the labour and capital applied to the 
 production of commodities will only produce a pro- 
 duct selling for half an ounce of gold, and it will in 
 consequence ' pay ' these requisites of production to 
 crush any quartz that yields more than half an ounce 
 of gold to the ton. By producing commodities they 
 only get half an ounce of gold. So long, therefore, as 
 quartz yielding more than this half ounce can be 
 found, capital and labour will be devoted to work it. 
 But the application of labour, &c., to the crushing of 
 inferior quartz is, of course, equivalent to a rise in the 
 cost of production of gold, a fall in general prices is, 
 therefore, immediately operative in raising the cost of 
 producing gold, and were prices to fall to one-tenth 
 of their present level, quartz which required ten times 
 as much expenditure of the use of capital and labour 
 would be brought into requisition. So it would still 
 be found that the most expensively produced gold 
 only just paid its cost of production. There is abso- 
 lutely no limit to the cost at which gold could be pro- 
 duced, and what this cost shall be is determined and 
 determined exclusively by the general retail price 
 level. 
 
 The law of price asserted on page 81 is, we can 
 thus see, irrefutable by either of the arguments of the 
 currency school. So long as the sellers of commodi- 
 ties can sell all they have to offer at the current price, 
 prices cannot fall, and this holds good equally, 
 whether gold is scarce or plentiful. Sellers do not 
 
SCARCITY OF GOLD AS AN ECONOMIC FA CTOR. 197 
 
 trouble to ask any question as to the state of the 
 Bank reserve, or the cost at which gold is being pro- 
 duced. All they care to know is, whether they can 
 sell everything they have to offer at the current price. 
 If they believe they can, neither scarcity of gold, nor 
 cost of gold, nor anything to do with gold, will induce 
 them to take a lower price. If, on the other hand, 
 they believe that they will not be able to sell all they 
 have to offer at the current price, then prices will fall, 
 no matter how plentiful gold may be, or to what 
 depth its cost of production may have fallen. 
 
 It does not matter how much money there may 
 be in existence or in the banks, or even in the pockets 
 of private individuals, prices are affected only by 
 the application of purchasing power as a Demand. 
 
 The mere fact of an increase or decrease in the 
 amount of existing money in a community can have 
 no effect on prices. If the amount of money in 
 everyone's purse were miraculously doubled, why 
 should that fact oblige anyone to pay more for a loaf 
 of bread or a hat ? The baker sold me a loaf for 
 threepence before ; how will he be able now to 
 induce me to pay sixpence, or even fourpence ? He 
 will make his usual profit on the sale if I pay him 
 threepence as before, and the competition of other 
 bakers will prevent him making more than the usual 
 profit. So with the hatter. If everyone resolves to 
 use no more money than before this miraculous 
 increase and behaves as if he had not got it, no 
 rise in price will occur. It is only when the posses- 
 sion of more money induces people to try to buy 
 more loaves or more hats, to apply more purchasing 
 power to buy goods at current prices, that they will 
 
198 SCAR CITY OF G OLD AS AN ECONOMIC FA CTOR. 
 
 find these prices rise. It is only when these shop- 
 keepers perceive that they could sell at current prices 
 more goods than they have got that they raise their 
 prices, and sell all they have at a little higher price. 
 So a fall of price will only be brought about when 
 the shopkeeper perceives that a smaller number of 
 people than usual are offering to buy loaves or hats 
 at the usual prices. When the case is thus concretely 
 put it will be obvious that no change of price can 
 come in any other way than by an alteration in the 
 ratio which Supply bears to the Quantity demanded. 
 
 Though the more or less of the gold currency in 
 existence has nothing to do with the determination of 
 general price levels, the entry of gold into circulation 
 does to some extent affect them. It is, therefore, 
 desirable, before quitting this subject, to glance at the 
 method in which such effects are caused, and to note 
 the limitations to which they are necessarily subject. 
 
 The way in which gold comes into circulation is 
 this: Governments give to gold miners or their 
 representatives an amount of general purchasing 
 power, in the shape of money or notes, in return 
 for the gold they bring. This general purchasing 
 power, according as it is used or is not used by the 
 miners, has its effect in increasing or diminishing the 
 aggregate quantity of commodities demanded upon 
 which prices depend. 
 
 If in any given year the same body of gold 
 producers doubles the amount of gold they furnish 
 the Government, and consequently receive twice as 
 much power to purchase as before, the full exercise 
 of this increased power to demand will raise prices 
 to the extent necessary to restore the proper ratio 
 
SCARCITY OF GOLD AS AN ECONOMIC FACTOR. 199 
 
 between the aggregate supply and the aggregate 
 demanded. In the same way any decrease in 
 the amount of gold added to the currency in any 
 year will so far affect prices in that it diminishes the 
 amount of quantity demanded to an extent corre- 
 sponding with the amount of the decrease. Thus, if 
 in any year the amount of gold added to thac available 
 for currency purposes exceeds the average amount 
 by two millions, the only effect on price is through 
 an increase in quantity demanded to the extent oi 
 two millions, assuming supply to be stable. If, as is 
 actually alleged, during the last fifteen years the 
 yearly addition of gold to our currency is . 2,000,000 
 less than it ought to be in order to maintain the same 
 proportion between gold currency and volume of 
 trade, the general effect on prices is limited to the 
 effect produced by a decline of . 2,000,000 in quan- 
 tity demanded in relation to a fixed supply. This 
 diminution of . 2,000,000 in quantity demanded 
 represents a fall in the aggregate amount of pur- 
 chasing power handed over to gold miners in return 
 for gold, and it presumes that the same amount 
 of capital and labour has been engaged in the pro- 
 duction of the smaller amount of gold as was 
 formerly engaged in producing a larger amount. 
 
 But, suppose that those engaged in the production 
 of gold, finding that they can no longer produce the 
 same amount of gold as before with the same expen- 
 diture of capital and labour, that the amount they are 
 able to supply to England has sunk from 3! millions 
 to if millions, act in accordance with the general 
 action of commerce, what will be the result ? An 
 amount of which capital and labour, formerly was 
 
200 SCARCITY OF GOLD AS AN ECONOMIC FACTOR. 
 
 able to produce . 2,000,000 of gold, is gradually 
 removed from gold production, 1 and is applied to 
 some other productive work, whereby we have a 
 right to assume . 2,000,000 worth of new supply is 
 created. These quondam gold miners now possess 
 the same amount of purchasing power as they did 
 when they were engaged in producing gold, say, 
 . 2,000,000, and the total amount of purchasing power 
 possessed by the community is the same as before. 
 On the other hand, the aggregate of supply (exclud- 
 ing gold) has been increased by the . 2,000,000 
 fresh supply contributed by our quondam gold 
 miners. Hence the total disturbance in the rela- 
 tions of supply and quantity demanded is still limited 
 to . 2,000,000. 
 
 Assuming that when gald production falls from 3! 
 millions to if millions, the same amount of the re- 
 quisites of production are still employed in producing 
 this smaller aggregate result, while the aggregate 
 supply of the community (excluding gold) remains 
 as before, the total purchasing power and, assuming 
 it to be all used, the total quantity demanded, is 
 decreased by two millions. On the other hand, sup- 
 pose the requisites of production formerly engaged 
 in gold production are applied with equal efficacy to 
 some other production, the total producing power 
 and the total quantity demanded remain as before, 
 but supply is increased by two millions. Thus the 
 direct effect of this fall off in gold production upon price 
 
 1 If it be objected by ' practical ' readers that capital invested in 
 mines cannot be removed, we need only remind them that as the 
 forms of capital need constant renewal, the abstention from such 
 renewal comes to the same thing as the actual withdrawal of existing 
 capital. 
 
SCARCITY OF GOLD AS AN ECONOMIC FACTOR. 201 
 
 is in no case greater than is to be accounted for by an 
 addition of . 2,000,000 to the total supply, or a sub- 
 traction of the same amount from the total of quan- 
 tity demanded. 
 
 Now, let us ask to what extent this can affect 
 prices ? The total income of the United King- 
 dom has been estimated by Mr. Leone Levi to 
 be about . 1,270,000,000, and Mr. Gififen accepts 
 that figure as a minimum. 1 This sum then, 
 represents the total purchasing power, the demand 
 power of the community; and, assuming a stable 
 condition of supply, any increase or decrease of 
 this sum will affect general prices proportionately. 
 Now, the whole alleged effect of the scarcity of gold 
 is to diminish this grand total by . 2,000,000. The 
 fall of prices thus brought about could only be to the 
 
 extent of 2 or less than th per cent., for by that 
 1270, 
 
 amount alone is the aggregate quantity demanded 
 reduced. Yet the scarcity in gold has been adduced 
 as an explanation of a general fall in prices amounting 
 to not less than thirty per cent. 2 between the years 
 1872 and 1885. 
 
 1 Giffen " Essays in Finance," p. 460 (note). 
 
 2 Griffen " Essays in Finance," p. 19. 
 
202 PRA CTICA L CONSIDER A TIONS. 
 
 CHAPTER VIII. 
 
 PRACTICAL CONSIDERATIONS. 
 
 ANYONE who has carefully perused the foregoing 
 chapters will perceive that the theory therein set forth 
 will, if it be correct, admit and indeed demand certain 
 practical applications which are opposed to the whole 
 tenour of economic legislation. With regard to the 
 statement of these practical considerations we are in 
 the following dilemma. If we refrain from all such 
 statement we shall lay ourselves open to the imputa- 
 tion of being blind to certain practical issues which 
 will seem on first sight to furnish a rednctio ad 
 absurdum reply to our argument. On the other hand, 
 if w^e attempt to lay much stress upon what we hold 
 to be inevitable practical deductions from our theory, 
 we shall be driven into long and intricate lines of 
 defence which, from the very importance of the issues 
 with which they deal, will divert the attention of the 
 reader from the theoretic basis of the earlier chapters. 
 Moreover, while we feel confident that the theoretic 
 basis of this work will stand the test of close criticism, 
 we are by no means sure that, in attempting to apply 
 
PRACTICAL CONSIDERATIONS. 203 
 
 these principles fairly to the intricate system of com- 
 mercial facts, we shall successfully avoid all those 
 fallacies which all economists find in the work of their 
 fellows, and which, when disclosed, are often unjustly, 
 though not unnaturally, held to impair the correctness 
 of the main principles from which they are incorrectly 
 deduced. 
 
 It has, therefore, seemed wisest to us to make 
 a brief and general statement of those practical 
 tendencies and conclusions which seem justified by 
 our theory, and to leave the fuller exposition and 
 defence of them for a future occasion. If these prac- 
 tical considerations seem to involve much that is 
 startling and somewhat that is retrograde, we would 
 urge that we have endeavoured, in accordance with 
 the advice of Plato, ' to follow whithersoever the argu- 
 ment shall lead us.' 
 
 i. It will be evident that the question of method of 
 taxation, in so far as it bears upon the rate of con- 
 sumption and of saving, will be directly affected by the 
 foregoing theory. In all periods of under-consumption 
 (i.e., of low prices and depressed trade) taxation should 
 clearly be directed so as to be the smallest check upon 
 consumption. Since under-consumption has been 
 traced to an excessive desire to save, a rational method 
 of taxation will aim at restricting the motive to save, 
 while offering every encouragement to the desire to 
 spend. 
 
 The tendency of taxation in England is based upon 
 the opposite principle ; it seeks to restrict consump- 
 tion by artificially raising the price of certain com- 
 modities classed under the name of luxuries. Beer, 
 wine, spirits, tobacco, tea, plate, carriages, horses, 
 
204 PRACTICAL CONSIDERATIONS. 
 
 railway-tickets, &c., are all more or less heavily taxed, 
 in most cases with the avowed intention of checking 
 consumption. So, again, the income-tax is levied so 
 as to operate in the same way. If an individual will 
 consent to save a portion of his income and apply it 
 to insuring his life, this portion of his income is 
 exempted from income-tax with the avowed object of 
 encouraging thrift. The indirect and unintentional 
 effect of the mode of levying the income-tax makes 
 in the same direction. The expenditure of an indivi- 
 dual attracts the attention of the assessors, and ensures 
 the full assessment ; on the other hand, an individual 
 who lives penuriously frequently evades the tax 
 merely because he is a saving man. Thus we see that 
 our methods of direct and indirect taxation operate to 
 check expenditure and encourage saving. When the 
 existence of under-consumption proves the operation of 
 an excessive desire to save, it is evident that taxation 
 should rightly be directed to check saving, and not 
 expenditure, and should fall on that portion of the in- 
 dividual's income which he refuses to spend. Other 
 legislative enactments which operate in the same 
 manner are the laws of entail and settlement. The 
 only possible advantages which can be claimed for 
 these laws are that individuals are thereby prevented 
 from spending more than their incomes ; they are 
 deterrents of extravagance and waste. 
 
 Since the supposition of a state of under-consump- 
 tion implies that any increase in the quantity de- 
 manded, whatever be the nature of the commodities 
 demanded, will have a beneficial effect upon com- 
 merce by providing a use for an increased quantity of 
 the Requisites of Production, it will follow that the 
 
PRACTICAL CONSIDERATIONS. 205 
 
 full stress of all taxation should fall on accumulated 
 property, so as to check the creation of fresh stocks 
 of unneeded and injurious Capital. To put it in a i/ 
 single phrase, all forms of Savings should be taxed. 
 
 Any reader who, without troubling himself with 
 the preceding argument should turn to the last 
 chapter to see ' what the book is about/ should cast 
 his eye upon this sentence, will doubtless pronounce 
 the notion preposterous, and will read no more. 
 But all who have followed the course of the pre- 
 ceding chapters will be compelled to the acceptance of 
 this first practical application. Where Under-consump- 
 tion exists, Savings should be taxed. We have shown ^ 
 above that Under-consumption is no mere term to 
 describe a momentary and occasional crisis, but rather 
 describes a commercial malady which is chronic in the 
 industrial life of modern European nations. 
 
 Without entering at length into the large question 
 of Free Trade, it is right to indicate the bearing 
 which the theory of Under-consumption has upon the 
 practical issues involved. The advantage claimed for 
 Free Trade rightly rests on the assumption that, in 
 just proportion as there is freedom of competition 
 among individuals, groups of individuals, or nations, 
 in respect of production, the various Requisites of 
 Production will be put to an effective use ; that 
 capital and labour, left without the artificial guidance 
 and attraction of protective tariffs or bounties, will 
 tend to employ themselves in those forms of produc- 
 tion in which they can be used most effectively, i.e., 
 in which they will produce the largest amount of 
 wealth. Left free to find their own level, that em- 
 ployment which engages them by higher profits and 
 
206 PRACTICAL CONSIDERATIONS. 
 
 higher wages will be the employment which will 
 enable them to contribute most to the aggregate pro- 
 duction of wealth of the community. Just as indi- 
 viduals left free in the use of their productive powers 
 will find, on the average, that their own greatest gain 
 lies in that work which contributes most to the gain 
 of the community, so, if there were absolute equality 
 of competition amongst a group of nations, each 
 nation would so employ its productive powers as to 
 produce its maximum of wealth with its minimum of 
 exertion. Thus, in proportion as one or more nations 
 adopt protective measures, either in the shape of tax 
 or bounty, the protected industries use an excessive 
 amount of requisites of production in their work, and 
 lessen the aggregate of wealth produced, damaging 
 their own interests, and to a less extent the interests 
 of other nations belonging to the industrial com- 
 munity. This is the theory of free trade stated in its 
 broad principles. Now, with this theory, taken in 
 vacuo, we have no quarrel ; it is perfectly correct as a 
 theory of exchange in an ideal industrial community. 
 But, as a working principle of practical economics, it 
 .involves one important assumption. 
 
 Free Trade requires for its advantageous working a 
 perfectly healthy condition of commerce, where the 
 demand always keeps pace with the possibility of 
 Supply ; in a word, it assumes that whatever can be 
 produced will be produced, and that whatever is pro- 
 duced is consumed. In such a condition it will be 
 evident that any species of Protection will lessen 
 the amount of possible production by increasing the 
 average quantity of requisites of production packed in 
 each Commodity, and will restrict the amount of Con- 
 
PRACTICAL CONSIDERATIONS. 207 
 
 sumption. But in a diseased state of Commerce, 
 where Under-consumption, acting by the pressure of 
 Over-supply, has so congested the retail-system that 
 an excessive amount of the requisites of production is 
 already packed in each commodity, it by no means 
 follows that a Protective System will have the same 
 noxious result. 
 
 A protective tariff imposed in such a state so as 
 to increase the average cost of making (i.e., the 
 average amount of uses of requisites of production) of 
 each piece of goods, would act as a preventive check to 
 that process whereby requisites of production formerly 
 engaged in Making passed into Retailing. For the 
 congestion of Retail trade was seen to have been 
 brought about in the following manner: A larger 
 quantity of requisites of production existed than were 
 economically required to produce the quantity of com- 
 modities the community would consent to consume. 
 Since the amount of requisites of production which can 
 be occupied in making cannot for any length of time 
 exceed the minimum which the conditions of pro- 
 duction require, while the work of trading can be 
 easily distended so as to provide employment for any 
 quantity of requisites of production, any excess of re- 
 quisites of production which from time to time may 
 occur in the making departments (whether by a fall 
 off in consumption or by an application of more 
 economic methods in manufacturing) is continually 
 expelled from the making department and compelled 
 to take refuge in the trading department, which, we 
 have seen, becomes congested with excessive forms of 
 capital and labour. In such a condition of affairs it 
 is evident that any legislative restriction which might 
 
208 PRACTICAL CONSIDERATIONS. 
 
 artificially increase the quantity of requisites of pro- 
 duction whose use was required in making would 
 to that extent act as a preventive of the further con- 
 gestion of retail trade. In short, certain requisites 
 of production, which would otherwise have passed on 
 to increase the quantity of requisites of production 
 engaged in retailing, will be kept employed in 
 making. 
 
 To illustrate roughly, by figures, let us suppose 
 that, in order to supply the current rate of consump- 
 tion in a community, it is necessary that 9 x requisites 
 of production be engaged in making and i x in 
 retailing. Now, suppose that by saving, growth of 
 population, and opening of new lands, 12 x requisites 
 of production have come into existence. If this 
 growth of the requisites of production has been 
 coincident with a corresponding growth of consump- 
 tion, all is well. But assume that the rate of con- 
 sumption has remained the same, inducing that state 
 of over-supply which is chronic in modern commu- 
 nities, what will happen ? Under a condition of 
 Free Trade internal competition will (as we have 
 shown, Chapter VI.) force the excessive 2 x requi- 
 sites of production into retailing until 3 x requisites 
 of production are swallowed up in performing the 
 work which could economically be done by i x. If, 
 instead of conceding Free Trade, we assume a tariff 
 which compels makers to devote themselves to kinds of 
 making which require nx requisites of production in 
 order to produce the same quantity of goods for- 
 merly produced by 9 x requisites of production, it is 
 clear that, instead of the 2 x requisites of production 
 engaging themselves in retail trade, they will be com- 
 
PRACTICAL CONSIDERATIONS. 209 
 
 pelled to engage in making in order that the actual 
 demand may be supplied. Thus, the only result of 1 1 
 Protection would be that an excess of requisites of 
 production would be employed in making instead of 
 in retailing. In other words, we claim to have clearly 
 shown that, in a state of depressed trade, a large 
 amount of requisites of production is forced into re- 
 tailing which is not there required, and which, how- 
 ever busily employed, performs no valuable service. 
 The result of protective measures would, by pro- 
 viding employment for a larger quantity of requisites 
 of production in the processes of making, prevent 
 this unhealthy expansion of retail trade. If it be 
 urged that the effect would only be to substitute 
 waste in one point of the industrial machine forH 
 waste in another point, we admit the truth of this 
 contention. The point on which we lay stress is 
 simply this, that, in a condition of depressed trade, 
 Protective measures do not inflict the damage which 
 the orthodox Freetraders assign to them. 
 
 The theory of the Limiting Requisite set forth in 
 Chapter VI. will, of course, suggest various practical 
 considerations of importance to the largest class of 
 the community, those whose sole requisite of produc- 
 tion is labour. The question for them is how to 
 keep labour in the position of limiting requisite. It 
 is evident that so long as the quantity of labour 
 offered for use exceeds the total required, the 
 wages of labour will be kept at the minimum for 
 which such quantity of labour will be supplied. 
 To limit the available quantity of labour not abso- 
 lutely but relatively to the quantity of labour 
 
 H 
 

 210 PRACTICAL CONSIDERATIONS. 
 
 required, will therefore be the interest of the labour- 
 ing classes. This end they may achieve by the fol- 
 lowing means : 
 
 a. By doing all in their power to increase the 
 general consumption they will be increasing the 
 quantity of the use of all the requisites of production 
 in current demand. In ordinary circumstances, it has 
 been seen, it is easier to increase the available amount 
 of capital and natural agents than to increase the 
 available amount of labour. Thus, every absolute 
 increase of the quantity consumed in a community 
 tends to strengthen the control of labour over pro- 
 duction. If in a community there exists surplus 
 labour to the smallest appreciable extent, say five per 
 cent., ordinary wages are kept to a minimum. But if 
 in such an industrial condition there was a desire 
 to add ten per cent, to consumption, and therefore 
 to the demand for the use of each requisite of 
 production, it is clear that labour, being unable to 
 supply more than five per cent, increase, would, 
 from the difficulty and slowness of any further in- 
 crease, be placed in the position of limiting requisite, 
 and would take in wages the whole result of pro- 
 duction, minus that fraction for which the owners of 
 capital and natural agents would consent to use their 
 possessions. 
 
 But though labour will theoretically be enabled at 
 last to secure the full advantage of any such increase 
 in consumption, it has been pointed out that the in- 
 tricate and slow operation of such commercial move- 
 ments will, in fact, divide the immediate benefit 
 among the owners of all the requisites of production, 
 
PRACTICAL CONSIDERATIONS. 211 
 
 as was illustrated by what occurred during the swollen 
 consumption of the Franco-German war period. Any 
 increase in general consumption will increase the 
 total fund out of which profits, rent, wages are paid, 
 and all will gain by such increase, though not in the 
 same proportion. 
 
 /3. Labour may mitigate the worst effect of under- 
 consumption, without causing any increase in general 
 consumption. 
 
 i. If the labourer has open to him an alternative 
 method of subsistence, whether this be squatting on 
 vacant land, workhouse accommodation, or facilities 
 for emigration, it is universally admitted that such 
 alternative measures the minimum of wages which he 
 can receive for selling the use of his labour to the 
 capitalist. 
 
 The effect of any of these alternatives is that the 
 labourers will never accept lower wages for their 
 labour than the equivalent of the best alternative open 
 to them ; for instance, if they would prefer the work- 
 house to ten shillings a week, then wages cannot fall 
 below ten shillings a week, or if the workhouse 
 accommodation were so improved that the average 
 labourer regarded it as worth fifteen shillings a week, 
 then wages could never fall below fifteen shillings a 
 week. 
 
 Thus, labourers, if by legislative or other measures 
 they can raise the standard of the alternative 
 method of subsistence, can continually raise the 
 minimum of wages. Nor is it true, as economists often 
 maintain, that by so doing they are killing the goose 
 with the golden eggs. Assuming that there is 
 
212 PRACTICAL CONSIDERATIONS. 
 
 under-consumption, the effect of such increase 
 would be simply to divert into the pockets of the 
 labourers certain funds which would otherwise be 
 wasted in an undue multiplication of the retailing 
 classes. 
 
 2. It is also open to labourers by various methods 
 to so limit their numbers as to keep themselves in the 
 position of owners of the Limiting Requisite. What 
 can be done in this way has recently been shown by 
 the dock labourers. These labourers refused to work 
 below a certain minimum price, and a general strike, 
 that is to say, a withdrawal of the whole supply of 
 labour, promptly put the labourers in the position of 
 the requisite of production limiting production in 
 that particular district and trade. This action issued 
 in a general rise in the wages of the London dock 
 labourers. So soon as labourers resolutely refuse to 
 compete for work below a certain given hourly or 
 weekly price, wages cannot fall below that point. What 
 holds of the labourers of a single trade will here hold 
 of the labourers of a Community or Nation. If the 
 labourers of any nation are liable to have brought 
 into the arena of competition a class of foreign 
 labourers who will consent to work for less wages 
 than the minimum to which they have been accus- 
 tomed, it is evident that in any period of under-con- 
 sumption the introduction of such foreigners will 
 reduce the rate of wages to the point at which the 
 labourers with the lowest standard of comfort will 
 just consent to work. Thus the instinct which has 
 led Americans and Australians to refuse to permit 
 immigration of Chinese was a true instinct, and is justi- 
 
PRACTICAL CONSIDERATIONS. 213 
 
 fied by economic theory. Of course, if full economic 
 demand existed, so that consumption kept pace with 
 any possible increase of production, the competition 
 of Chinese or other foreign labour would, as the eco- 
 nomists urge, be harmless ; for in this case the foreign 
 labourers' wages would rise to the higher standard, 
 instead of depressing the higher standard to its own. 
 But it must not be forgotten that even in this case, 
 supposing the new labour to be practically unlimited 
 in quantity, it might put either capital or natural agents 
 in the position of the requisite of production limiting 
 production, and though the aggregate of wealth pro- 
 duced would be largely increased, a less share of 
 this wealth would fall to the labourers. 
 
 What holds of Chinese immigration to America, of 
 course holds also of the immigration of foreign 
 paupers to this country. If German labourers will 
 work for two shillings a day, the free admission of these 
 will, assuming a continuance of under-consumption, 
 eventually bring down English wages to this level. 
 Thus, it is clearly for the interest of the English 
 labourers to prevent, by legislation if necessary, such 
 free influx of foreign labour as shall enable the quantity 
 of labour demanded to be supplied at an unduly low 
 rate of wages. 
 
 Although it may not be at first sight obvious, the 
 same result will follow from any legal restriction of 
 number of hours of labour, provided it be accom- 
 panied by absolute prohibition of imported labour. 
 The effect of a law fixing the maximum hours of 
 labour at eight per diem, instead of, say, ten, would 
 be the same, so far as wages are concerned, as a law 
 
214 PRACTICAL CONSIDERATIONS. 
 
 which expelled from the community one-fifth of the 
 available labourers. Since each labourer will now 
 only produce four-fifths of what he produced before 
 (setting aside the vexed question of the effect of 
 shorter hours upon the quality of labour), five 
 labourers are now required where four were pre- 
 viously, and looking at the lowest kind of work, we 
 must conclude that each of the five labourers has to 
 be paid the same amount of wages as each of the four 
 were paid before. 
 
 It is, however, necessary to bear in mind that an 
 eight hours' bill must be universal. If otherwise (un- 
 less the nation enacting it isolated itself from all other 
 nations by tariffs) the competition of other nations 
 would undersell the eight hours' nation, ruin its capi- 
 talists, and so reduce the quantity of labour demanded 
 as to force either a general emigration of the la- 
 bourers, the repeal of the law, or its systematic and 
 general evasion. 
 
 Assuming, however, that the eight hours' labour law 
 is universal and that there is Under-consumption, the 
 increased sum paid to labourers as demand for the use 
 of labour will be deducted from the total of retail 
 profits. Or, to put it otherwise, the increased num- 
 ber of labourers required for certain of the stages of 
 production will be withdrawn from the number 
 unnecessarily engaged (directly or indirectly) in re- 
 tailing. Whilst, therefore, the total of production 
 will not be affected, the aggregate of labour actually 
 exerted will be reduced in the proportion of ten 
 to eight. In any period of full demand it is evident 
 that the aggregate produced would be reduced ; in all 
 
PRACTICAL CONSIDERATIONS. 215 
 
 such periods, therefore, it would be desirable to relax 
 any limits that might be imposed restricting the 
 hours of labour, unless it appeared that the ad- 
 vantages of increased leisure more than counter- 
 balanced the loss of wages which in such periods 
 would result. 
 
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