A history of Political Economy

Malthus has in more recent times derived a certain degree of reflected lustre from the rise and wide acceptance of the Darwinian hypothesis. Its author himself, in tracing its filiation, points to the phrase "struggle ior existence" used by Malthus in relation to the social competition. Darwin believes that man has advanced to his present relatively high condition through such a struggle, consequent on his rapid multiplication. He regards, it is true, the agency of this cause for the improvement of our race as largely superseded by moral influences in the more advanced social stages. Yet he considers it, even in these stages, of so much importance towards that end, that notwithstanding the individual suffering arising from the struggle for life, he deprecates any great reduction in the natural, by which he seems to mean the ordinary, rate of increase.

There has been of late exhibited in some quarters a tendency to apply the doctrine of the "survival of the fittest" to human society in such a way as to intensify the harsher features of Malthus's exposition by encouraging the idea that whatever cannot sustain itself is fated, and must be allowed, to disappear. But what is repellent in this conception is removed by a wide view of the influence of humanity, as a disposing power, alike on vital and on social conditions. As in the general animal domain the supremacy of man introduces a new force consciously controlling and ultimately determining the destinies of the subordinate species, so human providence in the social sphere can intervene for the protection of the weak, modifying by its deliberate action what would otherwise be a mere contest of comparative strengths inspired by selfish instincts.⁽⁴⁰⁾

David Ricardo (1772-1823) is essentially of the school of Smith, whose doctrines he in the main accepts, whilst he seeks to develop them, and to correct them in certain particulars. But his mode of treatment is very different from Smith's. The latter aims at keeping close to the realities of life as he finds them, -- at representing the conditions and relations of men and things as they are; and, as Hume remarked on first reading his great work, his principles are everywhere exemplified and illustrated with curious facts. Quite unlike this is the way in which Ricardo proceeds. He moves in a world of abstractions. He sets out from more or less arbitrary assumptions, reasons deductively from these, and announces his conclusions as true, without allowing for the partial unreality of the conditions assumed or confronting his results with experience. When he seeks to illustrate his doctrines, it is from hypothetical cases, -- his favourite device being that of imagining two contracting savages, and considering how they would be likely to act. He does not explain -- probably he had not systematically examined, perhaps was not competent to examine -- the appropriate method of political economy; and the theoretic defence of his mode of proceeding was left to be elaborated by J. S. Mill and Cairnes. But his example had a great effect in determining the practice of his successors. There was something highly attractive to the ambitious theorist in the sweeping march of logic which seemed in Ricardo's hands to emulate the certainty and comprehensiveness of mathematical proof, and in the portable and pregnant formulae which were so convenient in argument, and gave a prompt, if often a more apparent than real, solution of difficult problems. Whatever there was of false or narrow in the fundamental positions of Smith had been in a great degree corrected by his practical sense and strong instinct for reality, but was br ought out in its full dimensions and even exaggerated in the abstract theorems of Ricardo and his followers.

The dangers inherent in his method were aggravated by the extreme looseness of his phraseology . Senior pronounces him "the most incorrect writer who ever attained philosophical eminence." His most ardent admirers find him fluctuating and uncertain in the use of words, and generally trace his errors to a confusion between the ordinary employment of a term and some special application of it which he has himself devised.

The most complete exposition of his system is to be found in his Principles of Political Economy and Taxation (1817). This work is not a complete treatise on the science, but a rather loosely connected series of disquisitions on value and price, rent, wages, and profits, taxes, trade, money and banking. Yet, though the connection of the parts is loose, the same fundamental ideas recur continually, and determine the character of the entire scheme.

The principal problem to which he addresses himself in this work is that of distribution, -- that is to say, the proportions of the whole produce of the country which will be allotted to the proprietor of land, to the capitalist, and to the labourer.⁽⁴¹⁾ And it is important to observe that it is especially the variations in their respective portions which take place in the progress of society that he professes to study, -- one of the most unhistorical of writers thus indicating a sense of the necessity of a doctrine of economic dynamics -- a doctrine which, from his point of view, it was impossible to supply.

The principle which he puts first in order, and which is indeed the key to the whole, is this -- that the exchange value of any commodity the supply of which can be increased at will is regulated, under a régime of free competition, by the labour necessary for its production. Similar propositions are to be found in the Wealth of Nations, not to speak of earlier English writings. Smith had said that, "in the early and rude state of society which precedes both the accumulation of stock and the appropriation of land, the proportion between the quantities of labour necessary for acquiring different objects seems to be the only circumstance which can afford any rule ior exchanging them with one another." But he wavers in his conception, and presents as the measure of value sometimes the quantity of labour necessary for the production of the object, sometimes the quantity of labour which the object would command in the market, which would be identical only for a given time and place. The theorem requires correction for a developed social system by the introduction of the consideration of capital, and takes the form in which it is elsewhere quoted from Malthus by Ricardo, that the real price of a commodity "depends on the greater or less quantity of capital and labour which must be employed to produce it." (The expression "quantity of capital" is lax, the element oi time being omitted, but the meaning is obvious.) Ricardo, however, constantly takes no notice of capital, mentioning labour alone in his statement of this principle, and seeks to justify his practice by treating capital as "accumulated labour;" but this artificial way of viewing the facts obscures the nature of the co-operation of capital in production, and by keeping the necessity of this co-operation out of sight has encouraged some socialistic errors. Ricardo does not sufficiently distinguish between the cause or determinant and the measure of value; nor does he carry back the principle of cost of production as regulator of value to its foundation in the effect of that cost on the limitation of supply. It is the "natural price" of a commodity that is fixed by the theorem we have stated; the market price will be subject to accidental and temporary variations from this standard, depending on changes in demand and supply; but the price will permanently and in the long run, depend on cost of production defined as above. On this basis Ricardo goes on to explain the laws according to which the produce of the land and the labour of the country is distributed amongst the several classes which take part in production.

The theory of rent, with which he begins, though commonly associated with his name, and though it certainly forms the most vital part of his general economic scheme, was not really his, nor did he lay claim to it. He distinctly states in the preface to the Principles, that "in 1815 Mr. Malthus, in his Inquiry into the Nature and Progress of Rent, and a fellow of University College, Oxford, in his Essay on the Application of Capital to Land, presented to the world, nearly at the same moment, the true doctrine of rent." The second writer here referred to was Sir Edward West, afterwards a judge of the supreme court of Bombay. Still earlier than the time of Malthus and West, as M'Culloch has pointed out, this doctrine had been clearly conceived and fully stated by Dr. James Anderson in his Enquiry into the Nature of Corn-Laws, published at Edinburgh in 1777.⁽⁴²⁾ That this tract was unknown to Malthus and West we have every reason to believe; but the theory is certainly as distinctly enunciated and as satisfactorily supported in it as in their treatises; and the whole way in which it is put forward by Anderson strikingly resembles the form in which it is presented by Ricardo.

The essence of the theory is that rent, being the price paid by the cultivator to the owner of land for the use of its productive powers, is equal to the excess oi the price of the produce ot the land over the cost of production on that land. With the increase of population, and therefore of demand for food, inferior soils will be taken into cultivation; and the price of the entire supply necessary for the community will be regulated by the cost of production of that portion of the supply which is produced at the greatest expense. But for the land which will barely repay the cost of cultivation no rent will be paid. Hence the rent of any quality of land will be equal to the difference between the cost of production on that land and the cost of production of that produce which is raised at the greatest expense.

The doctrine is perhaps most easily apprehended by means of the supposition here made of the coexistence in a country of a series of soils of different degrees of fertility which are successively taken into cultivation as population increases. But it would be an error to believe, though Ricardo sometimes seems to imply it, that such difference is a necessary condition of the existence of rent. If all the land of a country were of equal fertility, still if it were appropriated, and if the price oi the produce were more than an equivalent for the labour and capital applied to its production, rent would be paid. This imaginary case, however, after using it to clear our conceptions, we may ior the future leave out of account.

The price of produce being, as we have said, regulated by the cost of production of that which pays no rent, it is evident that "corn is not high because a rent is paid, but a rent is paid because corn is high," and that "no reduction would take place in the price of corn although landlords should forego the whole of their rent." Rent is, in fact, no determining element of price; it is paid, indeed, out oi the price, but the price would be the same if no rent were paid, and the whole price were retained by the cultivator.

It has often been doubted whether or not Adam Smith held this theory of rent. Sometimes he uses language which seems to imply it, and states prepositions which, if developed, would infallibly lead to it. Thus he says, in a passage already quoted, "Such parts only of the produce of land can commonly be brought to market of which the ordinary price is sufficient to replace the stock which must be employed in bringing them thither, together with its ordinary profits. If the ordinary price is more than this, the surplus part of it will naturally go to the rent of land. If it is not more, though the commodity can be brought to market, it can afford no rent to the landlord. Whether the price is or is not more depends on the demand." Again, in Smith's application of these considerations to mines, "the whole principle of rent," Ricardo tells us, "is admirably and perspicuously explained." But he had formed the opinion that there is in fact no land which does not afford a rent to the landlord; and, strangely, he seems to have seen that this appearance might arise from the aggregation into an economic whole of parcels of land which can and others which cannot pay rent. The truth, indeed, is, that the fact, if it were a fact, that all the land in a country pays rent would be irrelevant as an argument against the Andersonian theory, for it is the same thing in substance if there be any capital employed on land already cultivated which yields a return no more than equal to ordinary profits. Such last-employed capital cannot afford rent at the existing rate of profit, unless the price of produce should rise.

The belief which some have entertained that Smith, notwithstanding some vague or inaccurate expressions, really held the Andersonian doctrine, can scarcely be maintained when we remember that Hume, writing to him after having read for the first time the Wealth of Nations, whilst expressing general agreement with his opinions, said (apparently with reference to Bk. I, chap. vii), "I cannot think that the rent of farms makes any part of the price of the produce, but that the price is determined altogether by the quantity and the demand." It is further noteworthy that a statement of the theory of rent is even in the same volume, published in 1777, which contains Anderson's polemic against Smith's objections to a bounty on the exportation of corn; this volume can hardly have escaped Smith's notice, yet neither by its contents nor by Hume's letter was he led to modify what he had said in his first edition on the subject of rent.

It must be remembered that not merely the unequal fertilities of different soils will determine differences of rent; the more or less advantageous situation of a farm in relation to markets, and therefore to roads and railways, will have a similar effect. Comparative lowness of the cost oi transit will enable the produce to be brought to market at a smaller expense, and will thus increase the surplus which constitutes rent. This consideration is indicated by Ricardo, though he does not give it prominence, but dwells mainly on the comparative productiveness of soils.

Rent is defined by Ricardo as the price paid for the use of "the original and indestructible powers of the soil." He thus differentiates rent, as he uses the term, from what is popularly designated by the word; and, when it is to be taken in his sense, it is often qualified as the,"true" or "economic" rent. Part of what is paid to the landlord is often really profit on his expenditure in preparing the farm for cultivation by the tenant. But it is to be borne in mind that wherever such improvements are "amalgamated with the land," and "add permanently to its productive powers," the return for them follows the laws, not of profit, but of rent. Hence it becomes difficult, if not impossible, in practice to discriminate with any degree of accuracy the amount received by the landlord "for the use of the original powers of the soil" from the amount received by him as remuneration for his improvements or those made by his predecessors. These have raised the farm, as an instrument for producing food, from one class of productiveness to a higher, and the case is the same as if nature had originally placed the land in question in that higher class.

Smith had treated it as the peculiar privilege of agriculture, as compared with other forms of production, that in it "nature labours along with man," and therefore, whilst the workmen in manufactures occasion the reproduction merely oi the capital which employs them with its owner's profits, the agricultural labourer occasions the reproduction, not only of the employer's capital with profits, but also of the rent of the landlord. This last he viewed as the free gift of nature which remained "after deducting or compensating everything which can be regarded as the work of man." Ricardo justly observes in reply that "there is not a manufacture which can be mentioned in which nature doe not give her assistance to man." He then goes on to quote from Buchanan the remark that "the notion of agriculture yielding a produce and a rent in consequence, because nature concurs with industry in the process of cultivation, is a mere fancy. It is not from the produce, but from the price at which the produce is sold, that the rent is derived; and this price is got, not because nature assists in the production, but because it is the price which suits the consumption to the supply."⁽⁴³⁾ There is no gain to the society at large from the rise of rent; it is advantageous to the landlords alone, and their interests are thus permanently in opposition to those of all other classes. The rise of rent may be retarded, or prevented, or even temporarily changed to a fall, by agricultural improvements, such as the introduction of new manures or of machines or of a better organisation of labour (though there is not so much room for this last as in other branches of production), or the opening of new sources of supply in foreign countries ; but the tendency to a rise is constant so long as the population increases.

The great importance of the theory of rent in Ricardo's system arises from the fact that he makes the general economic condition of the society to depend altogether on the position in which agricultural exploitation stands. This will be seen from the following statement of his theory of wages and profits. The produce of every expenditure of labour and capital being divided between the labourer and the capitalist, in proportion as one obtains more the other, will necessarily obtain less. The productiveness of labour being given, nothing can diminish profit but a rise of wages or increase it but a fall of wages. Now the price of labour, being the same as its cost of production, is determined by the price of the commodities necessary for the support of the labourer. The price of such manufactured articles as he requires has a constant tendency to fall, principally by reason of the progressive application of the division of labour to their production. But the cost of his maintenance essentially depends, not on the price of those articles, but on that of his food; and, as the production of food will in the progress of society and of population require the sacrifice of more and more labour, its price will rise; money wages will consequently rise, and with the rise of wages profits will fall. Thus it is to the necessary gradual descent to inferior soils, or less productive expenditure on the same soil, that the decrease in the rate of profit which has historically taken place is to be attributed (Smith ascribed this decrease to the competition of capitalists, though in one place, Book I, chap. ix,⁽⁴⁴⁾ he had a glimpse of the Ricardian view). This gravitation of profits towards a minimum is happily checked at times by improvements of the machinery employed in the production of necessaries, and especially by such discoveries in agriculture and other causes as reduce the cost of the prime necessary of the labourer; but here again the tendency is constant. Whilst the capitalist thus loses, the labourer does not gain ; his increased money wages only enable him to pay the increased price of his necessaries, of which he will have no greater and probably a less share than he had before. In fact, the labourer can never for any considerable time earn more than what is required to enable the class to subsist in such a degree of comfort as custom has made indispensable to them, and to perpetuate their race without either increase or diminution. That is the "natural" price of labour; and if the market rate temporarily rises above it population will be stimulated, and the rate of wages will again fall. Thus whilst rent has a constant tendency to rise and profit to fall, the rise or fall of wages will depend on the rate of increase of the working classes. For the improvement of their condition Ricardo thus has to fall back on the Malthusian remedy, of the effective application of which he does not, however, seem to have much expectation. The securities against a superabundant population to which he points are the gradual abolition of the poor-laws -- for their amendment would not content him -- and the development amongst the working classes of a taste for greater comforts and enjoyments.

It will be seen that the socialists have somewhat exaggerated in announcing, as Ricardo's "iron law" of wages, their absolute identity with the amount necessary to sustain the existence of the labourer and enable him to continue the race. He recognizes the influence of a "standard of living" as limiting the increase of the numbers of the working classes, and so keeping their wages above the lowest point. But he also holds that, in long-settled countries, in the ordinary course of human affairs, and in the absence of special efforts restricting the growth of population, the condition of the labourer will decline as surely, and from the same causes, as that of the landlord will be improved.

If we are asked whether this doctrine of rent and the consequences which Ricardo deduced from it, are true, we must answer that they are hypothetically true in the most advanced industrial communities, and there only (though they have been rashly applied to the cases of India and Ireland), but that even in those communities neither safe inference nor sound action can be built upon them. As we shall see hereafter, the value of most of the theorems of the classical economics is a good deal attenuated by the habitual assumptions that we are dealing with "economic men," actuated by one principle only; that custom, as against competition, has no existence; that there is no such thing as combination; that there is equality of contract between the parties to each transaction, and that there is a definite universal rate of profit and wages in a community; this last postulate implying (1) that the capital embarked in any undertaking will pass at once to another in which larger profits are for the time to be made; (2) that a labourer, whatever his local ties of feeling, family, habit, or other engagements, will transfer himself immediately to any place where, or employment in which, for the time, larger wages are to be earned than those he had previously obtained;⁽⁴⁵⁾ and (3) that both capitalists and labourers have a perfect knowledge of the condition and prospects of industry throughout the country, both in their own and other occupations. But in Ricardo's speculations on rent and its consequences there is still more of abstraction. The influence of emigration, which has assumed vast dimensions since his time, is left out of account, and the amount of land at the disposal of a community is supposed limited to its own territory , whilst contemporary Europe is in fact largely fed by the western States of America. We did not adequately appreciate the degree in which the augmented productiveness of labour, whether from increased intelligence, improved organization, introduction of machinery, or more rapid and cheaper communication, steadily keeps down the cost of production. To these influences must be added those of legal reforms in tenure, and fairer conditions in contracts, which operate in the same direction. As a result of all these causes, the pressure anticipated by Ricardo is not felt, and the cry is of the landlords over falling rents. not of the consumer over rising prices. The entire conditions are in fact so altered that Professor Nicholson, no enemy to the "orthodox", economics, when recently conducting an inquiry into the present state of the agricultural question,⁽⁴⁶⁾ pronounced the so-called Ricardian theory of rent "too abstract to be of practical utility."

A particular economic subject on which Ricardo has thrown a useful light is the nature of the advantages derived from foreign commerce, and the conditions under which such commerce can go on. Whilst preceding writers had represented those benefits as consisting in affording a vent for surplus produce, or enabling a portion of the national capital to replace itself with a profit, he pointed out that they consist " simply and solely in this, that it enables each nation to obtain, with a given amount of labour and capital, a greater quantity of all commodities taken together." This is no doubt the point of view at which we should habitually place ourselves ; though the other forms of expression employed by his predecessors, including Adam Smith, are sometimes useful as representing real considerations affecting national production, and need not be absolutely disused.