Appendix L Ricardo's Doctrine as to Taxes and Improvements in Agriculture.

Much has already been said about the excellent of Ricardo's thought and the imperfections of his expression of it, and in particular notice has been taken of the causes which led him to lay down the law of diminishing return without proper qualifications. Similar remarks apply to his treatment of the influence of improvements and the incidence of taxes in agriculture. He was especially careless in his criticisms of Adam Smith; and as Malthus justly said (Summary of Section X. of his Political Economy), "Mr Ricardo, who generally looks to permanent and final results, has always pursued an opposite policy in reference to the rents of land. It is only by looking to temporary results, that he could object to Adam Smith's statement, that the cultivation of rice or of potatoes would yield higher rent than corn." And Malthus was perhaps not far wrong when he added:—"Practically, there is reason to believe that, as a change from corn to rice must be gradual, not even a temporary fall of rent would take place."

Nevertheless, in Ricardo's time it was of great practical importance to insist, and it is of much scientific interest even now to know, that in a country which cannot import much corn, it is very easy so to adjust taxes on cultivation and so to hinder improvements as to enrich the landlords for a time and to impoverish the rest of the people. No doubt when the people had been thinned by want, the landlords would suffer in pocket: but that fact took little of the force from Ricardo's contention that the enormous rise of agricultural prices and rents which occurred during his life was an indication of an injury to the nation beyond all comparison greater than the benefits received by the landlords. But let us now pass in review some of those arguments in which Ricardo delighted to start from sharply defined assumptions, so as to get clear net results, which would strike the attention; and which the reader might combine for himself so as to make them applicable to the actual facts of life.

Let us first suppose that the "Corn" raised in a country is absolutely necessary; i.e. that the demand for it has no elasticity, and that any change in its marginal cost of production would affect only the price that people paid for it, and not the amount of it consumed. And let us suppose that no Corn is imported. Then the effect of a tax of one-tenth on Corn would be to cause its real value to rise till nine-tenths as much as before would suffice to remunerate the marginal dose, and therefore every dose. The gross Corn surplus on every piece of land would therefore remain the same as before; but one-tenth being taken away as a tax, the remainder would be nine-tenths of the old Corn surplus. Since, however, each part of it would have risen in real value in the ratio of ten to nine, the real surplus would remain unchanged.

But the assumption that the demand for produce is absolutely inelastic is a very violent one. The rise in price would in fact be sure to cause an immediate falling-off in the demand for some kinds of produce, if not for the staple cereals: and therefore the value of Corn, i.e. produce in general, would never rise in full proportion to the tax, and less capital and labour would be applied in the cultivation of all lands. There would thus be a diminution in the Corn surplus from all lands, but not in the same proportion from all; and since a tenth of the Corn surplus would be taken by the tax, while the value of each part of it would have risen in less than the ratio of ten to nine, there would be a double fall in the real surplus. (The diagrams on page 158 suggest at once translations of those reasonings into the language of geometry.)

The immediate fall would be very great under modern conditions in which free importation of Corn prevents its real value from being much raised by the tax; and the same result would follow gradually, even in the absence of importation, if the rise in its real value diminished the numbers of the people; or, what is at least as probable, if it had the effect of lowering the standard of living, and the efficiency of the working population. These two effects would operate very much in the same way on the producer's surplus; both would make labour dear to the employer, while the latter would also make real time wages low to the worker.

Ricardo's reasonings on all these questions are rather difficult to follow: because he often gives no hint when he ceases to deal with results which are "immediate," and belong to a "short period" relatively to the growth of population; and passes to those which are "ultimate," and belong to a "long period" in which the labour value of raw produce would have time materially to affect the numbers of the people and therefore the demand for raw produce. When such interpreting clauses are supplied, very few of his reasonings will be found invalid.

We may now pass to his argument with regard to the influence of improvements in the arts of agriculture, which he divides into two classes. A special scientific interest attaches to his treatment of the first, which consists of those improvements that "I can obtain the same produce with less capital, and without disturbing the difference between the productive powers of the successive portions of capital"; of course neglecting for the purpose of his general argument the fact that any given improvement may be of greater service to one particular piece of land than another. (See above, Book IV. ch. III. § 4.) Assuming as before that the demand for Corn has no elasticity, he proved that capital would be withdrawn from the poorer lands (and from the more intensive cultivation of the richer lands), and therefore the surplus measured in Corn, the Corn surplus—as we may say—obtained by applications of capital under the most favourable circumstances, will be a surplus relatively to lands not so poor as those which were on the margin of cultivation before; and the differential productiveness of any two applications of capital remaining, by hypothesis, unchanged, the Corn surplus must necessarily fall, and of course the real value and the labour value of the surplus will fall much more than in proportion.

This may be made clear by the adjoining figure; in which curve ACrepresents the return which the land of the whole country, regarded as one farm, makes to doses of capital and labour applied to it, these doses being arranged not in the order of their application, but in that of their productiveness. In equilibrium OD doses are applied, the price of the Corn being such that a return DC is just sufficient to remunerate a dose; the whole amount of Corn raised being represented by the area AODC, of which AHC represents the aggregate Corn surplus. [We may pause to notice that the only change in the interpretation of this diagram which is required by our making it refer to the whole country instead of a single farm, arises from our not being able now, as we could then, to suppose that all the several doses of capital are applied in the same neighbourhood, and that therefore the values of equal portions (of the same kind) of produce are equal. We may however get over this difficulty by reckoning the expenses of transporting the produce to a common market as part of its expenses of production; a certain part of every dose of capital and labour being assigned to the expenses of transport.]

Now an improvement of Ricardo's first class will increase the return to the dose applied under the most favourable conditions from OA to OA', and the returns to other doses, not in like proportion, but by equal amounts. The result is that the new produce curve A'C' will be a repetition of the old produce curve AC, but raised higher than it by the distance AA'. If, therefore, there were an unlimited demand for corn, so that the old number of doses, OD, could be profitably applied, the aggregate Corn surplus would remain the same as before the change. But in fact such an immediate increase of production could not be profitable; and therefore an improvement of this kind must necessarily lessen the aggregate Corn surplus. And on the assumption made here by Ricardo that the aggregate produce is not increased at all, only OD' doses will be applied, OD' being determined by the condition that A'OD'C' is equal to AODC; and the aggregate Corn surplus will shrink down to A'H'C'. This result is independent of the shape of AC; and, which is the same thing, of the particular figures selected for the numerical illustration which Ricardo used in proof of his argument.

And here we may take the occasion to remark that numerical instances can as a rule be safely used only as illustrations and not as proofs: for it is generally more difficult to know whether the result has been implicitly assumed in the numbers shown for the special case than it is to determine independently whether the result is true or not. Ricardo himself had no mathematical training. But his instincts were unique; and very few trained mathematicians could tread as safely as he over the most perilous courses of reasoning. Even the acute logical mind of Mill was unequal to the task.

Mill characteristically observed that it is much more probable that an improvement would increase the returns to capital applied to different classes of land in equal proportions than by equal amounts. (See his second case, Political Economy, Book IV. ch. III. § 4.) He did not notice that by so doing he cut away the basis of Ricardo's sharply defined argument, which was that the change did not alter the differential advantages of different applications of capital. And though he arrived at the same result as Ricardo, it was only because his result was implicitly contained in the numbers he chose for his illustration.

The adjoining figure tends to show that there is a class of economic problems which cannot be safely treated by anyone of less genius than Ricardo without the aid of some apparatus, either of mathematics or of diagrams, that present as a continuous whole the schedules of economic forces, whether with regard to the Law of Diminishing Return or to those of Demand and Supply. The curve AC has the same interpretation in this figure as in the last; but the improvement has the effect of increasing the return to each dose of capital and labour by one-third, i.e. in an equal proportion and not by an equal amount: and the new produce curve A'C' stands much higher above AC at its left end than at its right. Cultivation is restricted to OD' doses, where the area A'OD'C', representing the new aggregate product, is as before equal to AODC; and A'H'C' is as before the new aggregate Corn surplus. Now it can be easily proved that A'H'C' is four-thirds of AKE, and whether this is greater or less than AHC depends upon the particular shape assigned to AC. If AC be a straight line or nearly a straight line (both Mill's and Ricardo's numbers represented points on a straight Produce line) A'H'C' would be less than AHC; but with the shape assigned to AC in our figure A'H'C' is greater than AHC. And thus Mill's argument is, while Ricardo's is not, dependent for its conclusion on the particular shape assumed by them for the gross produce curve.

(Mill assumes that the cultivated part of a country consists of three quantities of land, yielding at an equal expense 60, 80, and 100 bushels; and he then shows that an improvement which increased the return to each dose of capital by one-third, would lower corn rents in the ratio of 60 to 26 2/3. But if he had taken the distribution of fertility in a country to be such that the land consisted of three qualities yielding at an equal expense 60, 65, and 115 bushels, as is done roughly in our figure, he would have found in that case the improvement would raise corn rents in the ratio 60 to 66 2/3.)

Finally it may be noticed that Ricardo's paradox as to the possible effects of improvements on the rent of land is applicable to urban as well as agricultural land. For instance, the American plan of building stores sixteen stories high with steel frames, and served with elevators, may be supposed suddenly to become very efficient, economical and convenient in consequence of improvements in the arts of building, lighting, ventilation and the making of elevators. In that case the trading part of each town would occupy a less area than now; a good deal of land would have to revert to less remunerative uses; and the net result might possibly be a fall in the aggregate site values of the town.

They occupy a considerable place in the forthcoming volumes on Industry and Trade.

Some remarks on the relation of economics to the sum total of social science will be found in Appendix C, 1, 2.

The objections raised by some philosophers to speaking of two pleasures as equal, under any circumstances, seem to apply only to uses of the phrase other than those with which the economist is concerned. It has however unfortunately happened that the customary uses of economic terms have sometimes suggested the belief that economists are adherents of the philosophical system of Hedonism or of Utilitarianism. For, while they have generally taken for granted that the greatest pleasures are those which come with the endeavour to do one's duty, they have spoken of "pleasures" and "pains" as supplying the motives to all action; and they have thus brought themselves under the censure of those philosophers, with whom it is a matter of principle to insist that the desire to do one's duty is a different thing from a desire for the pleasure which, if one happens to think of the matter at all, one may expect from doing it; though perhaps it may be not incorrectly described as a desire for "self-satisfaction" or "the satisfaction of the permanent self." (See for instance T. H. Green, Prolegomena to Ethics, pp. 165-6.)

It may however be noted that some followers of Bentham (though perhaps not Bentham himself) made this large use of "pain and pleasure" serve as a bridge by which to pass from individualistic Hedonism to a complete ethical creed, without recognizing the necessity for the introduction of an independent major premiss; and for such a premiss the necessity would appear to be absolute, although opinions will perhaps always differ as to its form. Some will regard it as the Categorical Imperative; while others will regard it as a simple belief that, whatever be the origin of our moral instincts, their indications are borne out by a verdict of the experience of mankind to the effect that true happiness is not to be had without self-respect, and that self-respect is to be had only on the condition of endeavouring so to live as to promote the progress of the human race.

Compare Edgeworth's Mathematical Physics.

This is specially true of that group of gratifications, which is sometimes named "the pleasures of the chase." They include not only the light-hearted emulation of games and pastimes, of hunts and steeplechases, but the more serious contests of professional and business life: and they will occupy a good deal of our attention in discussions of the causes that govern wages and profits, and forms of industrial organization.

See an admirable essay by Cliffe Leslie on The Love of Money. We do indeed hear of people who pursue money for its own sake without caring for what it will purchase, especially at the end of a long life spent in business: but in this as in other cases the habit of doing a thing is kept up after the purpose for which it was originally done has ceased to exist. The possession of wealth gives such people a feeling of power over their fellow-creatures, and insures them a sort of envious respect in which they find a bitter but strong pleasure.

In fact a world can be conceived in which there is a science of economics very much like our own, but in it there is no money of any sort. See Appendices B, 8 and D, 2.

Some remarks on the large scope of economics as conceived in Germany will be found in Appendix D, 3.

Schmoller in the article on Volkswirtschaft in Conrad's Handwörterbuch.

The relation of "natural and economic laws," is exhaustively discussed by Neumann (Zeitschrift für die gesamte Staatswissenschaft, 1892) who concludes (p. 464) that there is no other word than Law (Gesetz) to express those statements of tendency, which play so important a part in natural as well as economic science. See also Wagner (Grundlegung, §§ 86-91).

They are discussed in Book V, especially chapters III and V.

Compare Book II, chapter I.

Some parts of economics are relatively abstract or pure, because they are concerned mainly with broad general propositions: for, in order that a proposition may be of broad application it must necessarily contain few details: it cannot adapt itself to particular cases; and if it points to any prediction, that must be governed by a strong conditioning clause in which a very large meaning is given to the phrase "other things being equal."

Book I, Chapter IV

This Section is reproduced from a Plea for the creation of a curriculum in economics and associated branches of political science addressed to the University of Cambridge in 1902, and conceded in the following year.

Logic, Bk. IV. ch. VII. Par. 2.

Origin of Species, ch. XIV.

We ought "to write more as we do in common life, where the context is a sort of unexpressed 'interpretation clause'; only as in Political Economy we have more difficult things to speak of than in ordinary conversation, we must take more care, give more warning of any change; and at times write out 'the interpretation clause' for that page or discussion lest there should be any mistake. I know that this is difficult and delicate work; and all that I have to say in defence of it is that in practice it is safer than the competing plan of inflexible definitions. Any one who tries to express various meanings on complex things with a scanty vocabulary of fastened senses, will find that his style grows cumbrous without being accurate, that he has to use long periphrases for common thoughts, and that after all he does not come out right, for he is half the time falling back into the senses which fit the case in hand best, and these are sometimes one, sometimes another, and almost always different from his 'hard and fast' sense. In such discussions we should learn to vary our definitions as we want, just as we say 'let x, y, z, mean' now this, and now that, in different problems; and this, though they do not always avow it, is really the practice of the clearest and most effective writers." (Bagehot's Postulates of English Political Economy, pp. 78, 9.) Cairnes also (Logical Method of Political Economy, Lect. VI.) combats "the assumption that the attribute on which a definition turns ought to be one which does not admit of degrees"; and argues that "to admit of degrees is the character of all natural facts."

When it is wanted to narrow the meaning of a term (that is, in logical language, to diminish its extension by increasing its intension), a qualifying adjective will generally suffice, but a change in the opposite direction cannot as a rule be so simply made. Contests as to definitions are often of this kind:—A and B are qualities common to a great number of things, many of these things have in addition the quality C, and again may the quality D, whilst some have both C and D. It may then be argued that on the whole it will be best to define a term so as to include all things which have the qualities A and B, or only those which have the qualities A, B, C, or only those which have the qualities A, B, D; or only those which have A, B, C, D. The decision between these various courses must rest on considerations of practical convenience, and is a matter of far less importance than a careful study of the qualities A, B, C, D, and of their mutual relations. But unfortunately this study has occupied a much smaller space in English economics than controversies as to definitions; which have indeed occasionally led indirectly to the discovery of scientific truth, but always by roundabout routes, and with much waste of time and labour.

For, in the words in which Hermann begins his masterly analysis of wealth, "Some Goods are internal, others external, to the individual. An internal good is that which he finds in himself given to him by nature, or which he educates in himself by his own free action, such as muscular strength, health, mental attainments. Everything that the outer world offers for the satisfaction of his wants is an external good to him."

The above classification of goods may be expressed thus:—

That part of the value of the share in a trading company which is due to the personal reputation and connection of those who conduct its affairs ought properly to come under the next head as external personal goods. But this point is not of much practical importance.

It is not implied that the owner of transferable goods, if he transferred them, could always realize the whole money value, which they have for him. A well-fitting coat, for instance, may be worth the price charged for it by an expensive tailor to its owner, because he wants it and cannot get it made for less: but he could not sell it for half that sum. The successful financier who has spent £50,000 on having a house and grounds made to suit his own special fancy, is from one point of view right in reckoning them in the inventory of his property at their cost price: but, should he fail, they will not form an asset to his creditors of anything like that value.

Comp. Wealth of Nations, Bk. II. ch. II.

"The bodies of men are without doubt the most valuable treasure of a country," said Davenant in the seventeenth century; and similar phrases have been common whenever the trend of political development has made men anxious that the population should increase fast.

The value of a business may be to some extent due to its having a monopoly, either a complete monopoly, secured perhaps by a patent; or a partial monopoly, owing to its wares being better known than others which are really equally good; and in so far as this is the case the business does not add to the real wealth of the nation. If the monopoly were broken down, the diminution of national wealth due to the disappearance of its value would generally be more than made up, partly by the increased value of rival businesses, and partly by the increased purchasing power of the money representing the wealth of other members of the community. (It should, however, be added that in some exceptional cases, the price of a commodity may be lowered in consequence of its production being monopolized: but such cases are very rare, and may be neglected for the present.)

A special case of this is the organization of credit. It increases the efficiency of production in the country, and thus adds to national wealth. And the power of obtaining credit is a valuable asset to any individual trader. If, however, any accident should drive him out of business, the injury to national wealth is something less than the whole value of that asset; because some part at least of the business, which he would have done, will now be done by others with the aid of some part at least of the capital which he would have borrowed.

There are similar difficulties as to how far money is to be reckoned as part of national wealth; but to treat them thoroughly would require us to anticipate a good deal of the theory of money.

As Cournot points out (Principes Mathématiques de la Théorie des Richesses, ch. II.), we get the same sort of convenience from assuming the existence of a standard of uniform purchasing power by which to measure value, that astronomers do by assuming that there is a "mean sun" which crosses the meridian at uniform intervals, so that the clock can keep pace with it; whereas the actual sun crosses the meridian sometimes before and sometimes after noon as shown by the clock.

Bacon, Novum Organon IV., says "Ad opera nil aliud potest homo quam ut corpora naturalia admoveat et amoveat, reliqua natura intus agit" (quoted by Bonar, Philosophy and Political Economy, p. 249).

Production, in the narrow sense, changes the form and nature of products. Trade and transport change their external relations.

Political Economy, p. 54. Senior would like to substitute the verb "to use" for the verb "to consume."

Thus flour to be made into a cake when already in the house of the consumer, is treated by some as a consumers' good; while not only the flour, but the cake itself is treated as a producers' good when in the hand of the confectioner. Carl Menger (Volkswirthschaftslehre, ch. I. § 2) says bread belongs to the first order, flour to the second, a flour mill to the third order and so on. It appears that if a railway train carries people on a pleasure excursion, also some tins of biscuits, and milling machinery and some machinery that is used for making milling machinery; then the train is at one and the same time a good of the first, second, third and fourth orders.

This is Jevons' definition (Theory of Political Economy, ch. V.), except that he includes only painful exertions. But he himself points out how painful idleness often is. Most people work more than they would if they considered only the direct pleasure resulting from the work; but in a healthy state, pleasure predominates over pain in a great part even of the work that is done for hire. Of course the definition is elastic; an agricultural labourer working in his garden in the evening thinks chiefly of the fruit of his labours; a mechanic returning home after a day of sedentary toil finds positive pleasure in his garden work, but he too cares a good deal about the fruit of his labour; while a rich man working in like manner, though he may take a pride in doing it well, will probably care little for any pecuniary saving that he effects by it.

Thus the Mercantilists who regarded the precious metals, partly because they were imperishable, as wealth in a fuller sense than anything else, regarded as unproductive or "sterile" all labour that was not directed to producing goods for exportation in exchange for gold and silver. The Physiocrats thought all labour sterile which consumed an equal value to that which it produced; and regarded the agriculturist as the only productive worker, because his labour alone (as they thought) left behind it a net surplus of stored-up wealth. Adam Smith softened down the Physiocratic definition; but still he considered that agricultural labour was more productive than any other. His followers discarded this distinction; but they have generally adhered, though with many differences in points of detail, to the notion that productive labour is that which tends to increase accumulated wealth; a notion which is implied rather than stated in the celebrated chapter of The Wealth of Nations which bears the title, "On the Accumulation of Capital, or on Productive and Unproductive Labour." (Comp. Travers Twiss, Progress of Political Economy, Sect, VI., and the discussions on the word Productive in J. S. Mill's Essays, and in his Principles of Political Economy.)

Among the means of production are included the necessaries of labour but not ephemeral luxuries; and the maker of ices is thus classed as unproductive whether he is working for a pastry-cook, or as a private servant in a country house. But a bricklayer engaged in building a theatre is classed as productive. No doubt the division between permanent and ephemeral sources of enjoyment is vague and unsubstantial. But this difficulty exists in the nature of things and cannot be completely evaded by any device of words. We can speak of an increase of tall men relatively to short, without deciding whether all those above five feet nine inches are to be classed as tall, or only those above five feet ten. And we can speak of the increase of productive labour at the expense of unproductive without fixing on any rigid, and therefore arbitrary line of division between them. If such an artificial line is required for any particular purpose, it must be drawn explicitly for the occasion. But in fact such occasions seldom or never occur.

All the distinctions in which the word Productive is used are very thin and have a certain air of unreality. It would hardly be worth while to introduce them now; but they have a long history; and it is probably better that they should dwindle gradually out of use, rather than be suddenly discarded.

Compare Carver, Principles of Political Economy, p. 474; which called my attention to Adam Smith's observation that customary decencies are in effect necessaries.

Thus in the South of England population has increased during the last hundred years at a fair rate, allowance being made for migration. But the efficiency of labour, which in earlier times was as high as that in the North of England, has sunk relatively to the North; so that the low-waged labour of the South is often dearer than the more highly-paid labour of the North. We cannot thus say whether the labourers in the South have been supplied with necessaries, unless we know in which of these two senses the word is used. They have had the bare necessaries for existence and the increase of numbers, but apparently they have not had the necessaries for efficiency. It must however be remembered that the strongest labourers in the South have constantly migrated to the North; and that the energies of those in the North have been raised by their larger share of economic freedom and of the hope of rising to a higher position. See Mackay in Charity Organization Journal, Feb. 1891.

If we considered an individual of exceptional abilities we should have to take account of the fact that there is not likely to be the same close correspondence between the real value of his work for the community and the income which he earns by it, that there is in the case of an ordinary member of any industrial class. And we should have to say that all his consumption is strictly productive and necessary, so long as by cutting off any part of it he would diminish his efficiency by an amount that is of more real value to him or the rest of the world than he saved from his consumption. If a Newton or a Watt could have added a hundredth part to his efficiency by doubling his personal expenditure, the increase in his consumption would have been truly productive. As we shall see later on, such a case is analogous to additional cultivation of rich land that bears a high rent: it may be profitable though the return to it is less than in proportion to the previous outlay.

Compare the distinction between "Physical and Political Necessaries" in James Steuart's Inquiry, A.D. 1767, II, XXI.

Thus a dish of green peas in March, costing perhaps ten shillings, is a superfluous luxury: but yet it is wholesome food, and does the work perhaps of three pennyworth of cabbage; or even, since variety undoubtedly conduces to health, a little more than that. So it may be entered perhaps at the value of fourpence under the head of necessaries, and at that of nine shillings and eightpence under that of superfluities; and its consumption may be regarded as strictly productive to the extent of one-fortieth. In exceptional cases, as for instance when the peas are given to an invalid, the whole ten shillings may be well spent, and reproduce their own value.

Book II, Chapter IV

This and similar facts have led some people to suppose not only that some parts of the modern analysis of distribution and exchange are inapplicable to a primitive community; which is true: but also that there are no important parts of it that are applicable; which is not true. This is a striking instance of the dangers that arise from allowing ourselves to become the servants of words, avoiding the hard work that is required for discovering unity of substance underlying variety of form.

See a report of a Committee of the British Association, 1878, on the Income Tax.

Professor Clark has made the suggestion to distinguish between Pure Capital and Capital Goods: the former is to correspond to a waterfall which remains stationary; while Capital Goods are the particular things which enter and leave the business, as particular drops pass through the waterfall. He would of course connect interest with pure capital, not with capital goods.

See above II. III. 1.

Adam Smith's distinction between fixed and circulating capital turned on the question whether the goods "yield a profit without changing masters" or not. Ricardo made it turn on whether they are "of slow consumption or require to be frequently reproduced"; but he truly remarks that this is "a division not essential, and in which the line of demarcation cannot be accurately drawn." Mill's modification is generally accepted by modern economists.

Compare above II. I. 3.

Just as for practical purposes it is better not to encumber ourselves with specifying the "income" of benefit which a man derives from the labour of brushing his hat in the morning, so it is better to ignore the element of capital vested in his brush. But no such consideration arises in a merely abstract discussion: and therefore the logical simplicity of Jevons' dictum that commodities in the hands of consumers are capital has some advantages and no disadvantages for mathematical versions of economic doctrines.

A short forecast of some of this work may be given here. It will be seen how Capital needs to be considered in regard both to the embodied aggregate of the benefits derivable from its use, and to the embodied aggregate of the costs of the efforts and of the saving needed for its production: and it will be shown how these two aggregates tend to balance. Thus in V. IV., which may be taken as in some sense a continuation of the present chapter, they will be seen balancing directly in the forecasts of an individual Robinson Crusoe; and—for the greater part at least—in terms of money in the forecasts of a modern business man. In either case both sides of the account must be referred to the same date of time; those that come after that date being "discounted" back to it; and those that come before being "accumulated" up to it.

In every part of our discussion of the causes that govern the accumulation and the application of productive resources, it will appear that there is no universal rule that the use of roundabout methods of production is more efficient than direct methods; that there are some conditions under which the investment of effort in obtaining machinery and in making costly provision against future wants is economical in the long run, and others in which it is not: and that capital is accumulated in proportion to the prospectiveness of man on the one hand, and on the other to the absorption of capital by those roundabout methods, which are sufficiently productive to remunerate their adoption. See especially IV. VII. 8; V. IV.; VI. I. 8; and VI. VI. 1.

The broader forces, that govern the production of capital in general and its contribution to the national income, are discussed in IV. VII. IX.-XI.: the imperfect adjustments of the money measures of benefits and costs to their real volume are discussed chiefly in III. III.-V; IV. VII.; and VI. III.-VIII.; the resulting share in the total product of labour and capital, aided by natural resources, which goes to capital, is discussed chiefly in VI. I. II. VI.-VIII. XI. XII.

Some of the chief incidents in the history of the definitions of Capital are given in Appendix E.

Book III, Chapter II

A woman may display wealth, but she may not display only her wealth, by her dress; or else she defeats her ends. She must also suggest some distinction of character as well as of wealth; for though her dress may owe more to her dressmaker than to herself, yet there is a traditional assumption that, being less busy than man with external affairs, she can give more time to taking thought as to her dress. Even under the sway of modern fashions, to be "well dressed"—not "expensively dressed"—is a reasonable minor aim for those who desire to be distinguished for their faculties and abilities; and this will be still more the case if the evil dominion of the wanton vagaries of fashion should pass away. For to arrange costumes beautiful in themselves, various and well-adapted to their purposes, is an object worthy of high endeavour; it belongs to the same class, though not to the same rank in that class, as the painting of a good picture.

It is true that many active-minded working men prefer cramped lodgings in a town to a roomy cottage in the country; but that is because they have a strong taste for those activities for which a country life offers little scope.

See Book II, ch. III. § 3.

As a minor point it may be noticed that those drinks which stimulate the mental activities are largely displacing those which merely gratify the senses. The consumption of tea is increasing very fast, while that of alcohol is stationary; and there is in all ranks of society a diminishing demand for the grosser and more immediately stupefying forms of alcohol.

This doctrine is laid down by Banfield, and adopted by Jevons as the key of his position. It is unfortunate that here as elsewhere Jevons' delight in stating his case strongly has led him to a conclusion, which not only is inaccurate, but does mischief by implying that the older economists were more at fault than they really were. Banfield says "the first proposition of the theory of consumption is that the satisfaction of every lower want in the scale creates a desire of a higher character." And if this were true, the above doctrine, which he bases on it, would be true also. But, as Jevons points out (Theory, 2nd Ed. p. 59), it is not true: and he substitutes for it the statement that the satisfaction of a lower want permits a higher want to manifest itself. That is a true and indeed an identical proposition: but it affords no support to the claims of the Theory of Consumption to supremacy.

Political Economy, ch. II.

The formal classification of Wants is a task not without interest; but it is not needed for our purposes. The basis of most modern work in this direction is to be found in Hermann's Staatswirthschaftliche Untersuchungen, Ch. II., where wants are classified as "absolute and relative, higher and lower, urgent and capable of postponement, positive and negative, direct and indirect, general and particular, constant and interrupted, permanent and temporary, ordinary and extraordinary, present and future, individual and collective, private and public."

Book III, Chapter III

It cannot be too much insisted that to measure directly, or per se, either desires or the satisfaction which results from their fulfilment is impossible, if not inconceivable. If we could, we should have two accounts to make up, one of desires, and the other of realized satisfactions. And the two might differ considerably. For, to say nothing of higher aspirations, some of those desires with which economics is chiefly concerned, and especially those connected with emulation, are impulsive; many result from the force of habit; some are morbid and lead only to hurt; and many are based on expectations that are never fulfilled. (See above I. II. 3, 4.) Of course many satisfactions are not common pleasures, but belong to the development of a man's higher nature, or to use a good old word, to his beatification; and some may even partly result from self-abnegation. (See I. II. 1.) The two direct measurements then might differ. But as neither of them is possible, we fall back on the measurement which economics supplies, of the motive or moving force to action: and we make it serve, with all its faults, both for the desires which prompt activities and for the satisfactions that result from them. (Compare "Some remarks on Utility" by Prof. Pigou in the Economic Journal for March, 1903.)

See Note I. in the Mathematical Appendix at the end of the Volume. This law holds a priority of position to the law of diminishing return from land; which however has the priority in time; since it was the first to be subjected to a rigid analysis of a semi-mathematical character. And if by anticipation we borrow some of its terms, we may say that the return of pleasure which a person gets from each additional dose of a commodity diminishes till at last a margin is reached at which it is no longer worth his while to acquire any more of it.

It may be noticed here, though the fact is of but little practical importance, that a small quantity of a commodity may be insufficient to meet a certain special want; and then there will be a more than proportionate increase of pleasure when the consumer gets enough of it to enable him to attain the desired end. Thus, for instance, anyone would derive less pleasure in proportion from ten pieces of wall paper than from twelve, if the latter would, and the former would not, cover the whole of the walls of his room. Or again a very short concert or a holiday may fail of its purpose of soothing and recreating: and one of double length might be of more than double total utility. This case corresponds to the fact, which we shall have to study in connection with the tendency to diminishing return, that the capital and labour already applied to any piece of land may be so inadequate for the development of its full powers, that some further expenditure on it even with the existing arts of agriculture would give a more than proportionate return; and in the fact that an improvement in the arts of agriculture may resist that tendency, we shall find an analogy to the condition just mentioned in the text as implied in the law of diminishing utility.

See I. II. 2.

See Note II. in the Mathematical Appendix.

Such a demand schedule may be translated, on a plan now coming into familiar use, into a curve that may be called his demand curve. Let Ox and Oy be drawn the one horizontally, the other vertically. Let an inch measured along Ox represent 10 lbs. of tea, and an inch measured along Oy represent 40d.

m1 being on Ox and m1p1 being drawn vertically from m1; and so for the others. Then p1p2.... p8 are points on his demand curve for tea; or as we may say demand points. If we could find demand points in the same manner for every possible quantity of tea, we should get the whole continuous curve DD' as shown in the figure. This account of the demand schedule and curve is provisional; several difficulties connected with it are deferred to chapter v.

Thus Mill says that we must "mean by the word demand, the quantity demanded, and remember that this is not a fixed quantity, but in general varies according to the value." (Principles, III. II. 4.) This account is scientific in substance; but it is not clearly expressed and it has been much misunderstood. Cairnes prefers to represent "demand as the desire for commodities and services, seeking its end by an offer of general purchasing power, and supply as the desire for general purchasing power, seeking its end by an offer of specific commodities or services." He does this in order that he may be able to speak of a ratio, or equality, of demand and supply. But the quantities of two desires on the part of two different persons cannot be compared directly; their measures may be compared, but not they themselves. And in fact Cairnes is himself driven to speak of supply as "limited by the quantity of specific commodities offered for sale, and demand by the quantity of purchasing power offered for their purchase." But sellers have not a fixed quantity of commodities which they offer for sale unconditionally at whatever price they can get: buyers have not a fixed quantity of purchasing power which they are ready to spend on the specific commodities, however much they pay for them. Account must then be taken in either case of the relation between quantity and price, in order to complete Cairnes' account, and when this is done it is brought back to the lines followed by Mill. He says, indeed, that "Demand, as defined by Mill, is to be understood as measured, not, as my definition would require, by the quantity of purchasing power offered in support of the desire for commodities, but by the quantity of commodities for which such purchasing power is offered." It is true that there is a great difference between the statements, "I will buy twelve eggs," and "I will buy a shilling's worth of eggs." But there is no substantive difference between the statement, "I will buy twelve eggs at a penny each, but only six at three halfpence each," and the statement, "I will spend a shilling on eggs at a penny each, but if they cost three halfpence each I will spend ninepence on them." But while Cairnes' account when completed becomes substantially the same as Mill's its present form is even more misleading. (See an article by the present writer on Mill's Theory of Value in the Fortnightly Review for April, 1876.)

We may sometimes find it convenient to speak of this as a raising of his demand schedule. Geometrically it is represented by raising his demand curve, or, what comes to the same thing, moving it to the right, with perhaps some modification of its shape.

The demand is represented by the same curve as before, only an inch measured along Ox now represents ten million pounds instead of ten pounds. And a formal definition of the demand curve for a market may be given thus:—The demand curve for any commodity in a market during any given unit of time is the locus of demand points for it. That is to say, it is a curve such that if from any point P on it, a straight line PM be drawn perpendicular to Ox, PM represents the price at which purchasers will be forthcoming for an amount of the commodity represented by OM.

That is, if a point moves along the curve away from Oy it will constantly approach Ox. Therefore if a straight line PT be drawn touching the curve at P and meeting Ox in T, the angle PTx is an obtuse angle. It will be found convenient to have a short way of expressing this fact; which may be done by saying that PT is inclined negatively. Thus the one universal rule to which the demand curve conforms is that it is inclined negatively throughout the whole of its length.

It is even conceivable, though not probable, that a simultaneous and proportionate fall in the price of all teas may diminish the demand for some particular kind of it; if it happens that those whom the increased cheapness of tea leads to substitute a superior kind for it are more numerous than those who are led to take it in the place of an inferior kind. The question where the lines of division between different commodities should be drawn must be settled by convenience of the particular discussion. For some purposes it may be best to regard Chinese and Indian teas, or even Souchong and Pekoe teas, as different commodities; and to have a separate demand schedule for each of them. While for other purposes it may be best to group together commodities as distinct as beef and mutton, or even as tea and coffee, and to have a single list to represent the demand for the two combined; but in such a case of course some convention must be made as to the number of ounces of tea which are taken as equivalent to a pound of coffee.

A great change in the manner of economic thought has been brought about during the present generation by the general adoption of semi-mathematical language for expressing the relation between small increments of a commodity on the one hand, and on the other hand small increments in the aggregate price that will be paid for it: and by formally describing these small increments of price as measuring corresponding small increments of pleasure. The former, and by far the more important, step was taken by Cournot (Recherches sur les Principes Mathématiques de la Théorie des Richesses, 1838); the latter by Dupuit (De la Mesure d'utilité des travaux publics in the Annales des Ponts et Chaussées, 1844), and by Gossen (Entwickelung der Gesetze des menschlichen Verkehrs, 1854). But their work was forgotten; part of it was done over again, developed and published almost simultaneously by Jevons and by Carl Menger in 1871, and by Walras a little later. Jevons almost at once arrested public attention by his brilliant lucidity and interesting style. He applied the new name final utility so ingeniously as to enable people who knew nothing of mathematical science to get clear ideas of the general relations between the small increments of two things that are gradually changing in causal connection with one another. His success was aided even by his faults. For under the honest belief that Ricardo and his followers had rendered their account of the causes that determine value hopelessly wrong by omitting to lay stress on the law of satiable wants, he led many to think he was correcting great errors; whereas he was really only adding very important explanations. He did excellent work in insisting on a fact which is none the less important, because his predecessors, and even Cournot, thought it too obvious to be explicitly mentioned, viz. that the diminution in the amount of a thing demanded in a market indicates a diminution in the intensity of the desire for it on the part of individual consumers, whose wants are becoming satiated. But he has led many of his readers into a confusion between the provinces of Hedonics and Economics, by exaggerating the applications of his favourite phrases, and speaking (Theory, 2nd Edn. p. 105) without qualification of the price of a thing as measuring its final utility not only to an individual, which it can do, but also to "a trading body," which it cannot do. These points are developed later on in Appendix I. on Ricardo's Theory of value. It should be added that Prof. Seligman has shown (Economic Journal, 1903, pp. 356-363) that a long-forgotten Lecture, delivered by Prof. W. F. Lloyd at Oxford in 1833, anticipated many of the central ideas of the present doctrine of utility.

Book III, Chapter IV

We may say that the elasticity of demand is one, if a small fall in price will cause an equal proportionate increase in the amount demanded: or as we may say roughly, if a fall of one per cent. in price will increase the sales by one per cent.; that it is two or a half, if a fall of one per cent. in price makes an increase of two or one half per cent. respectively in the amount demanded; and so on. (This statement is rough; because 98 does not bear exactly the same proportion to 100 that 100 does to 102.) The elasticity of demand can be best traced in the demand curve with the aid of the following rule. Let a straight line touching the curve at any point P meet Ox in T and Oy in t, then the measure of the elasticity at the point P is the ratio of PT to Pt.

Let us illustrate by the case of the demand for, say, green peas in a town in which all vegetables are bought and sold in one market. Early in the season perhaps 100 lb. a day will be brought to market and sold at 1s. per lb., later on 500 lb. will be brought and sold at 6d., later on 1,000 lb. at 4d., later still 5,000 at 2d., and later still 10,000 at 1½d. Thus demand is represented in fig. (4), an inch along Ox representing 5,000 lbs. and an inch along Oy representing 10d. Then a curve through p1p2 ... p5, found as shown above, will be the total demand curve. But this total demand will be made up of the demands of the rich, the middle class and the poor. The amounts that they will severally demand may perhaps be represented by the following schedules:—

We must however remember that the character of the demand schedule for any commodity depends in a great measure on whether the prices of its rivals are taken to be fixed or to alter with it. If we separated the demand for beef from that for mutton, and supposed the price of mutton to be held fixed while that for beef was raised, then the demand for beef would become extremely elastic. For any slight fall in the price of beef would cause it to be used largely in the place of mutton and thus lead to a very great increase of its consumption: while on the other hand even a small rise in price would cause many people to eat mutton to the almost entire exclusion of beef. But the demand schedule for all kinds of fresh meat taken together, their prices being supposed to retain always about the same relation to one another, and to be not very different from those now prevailing in England, shows only a moderate elasticity. And similar remarks apply to beet-root and cane-sugar. Compare the note on p. 100.

See above ch. II. § 1. In April 1894, for instance, six plovers' eggs, the first of the season, were sold in London at 10s. 6d. each. The following day there were more, and the price fell to 5s.; the next day to 3s. each; and a week later to 4d.

This estimate is commonly attributed to Gregory King. Its bearing on the law of demand is admirably discussed by Lord Lauderdale (Inquiry, pp. 51-3). It is represented in fig. (8) by the curve DD', the point A corresponding to the ordinary price. If we take account of the fact that where the price of wheat is very low, it may be used, as it was for instance in 1834, for feeding cattle and sheep and pigs and for brewing and distilling, the lower part of the curve would take a shape somewhat like that of the dotted line in the figure. And if we assume that when the price is very high, cheaper substitutes can be got for it, the upper part of the curve would take a shape similar to that of the upper dotted line.

Chronicon Preciosum (A.D. 1745) says that the price of wheat in London was as low as 2s. a quarter in 1336: and that at Leicester it sold at 40s. on a Saturday, and at 14s. on the following Friday.

Thus the general demand of any one person for such a thing as water is the aggregate (or compound, see V. VI. 3) of his demand for it for each use; in the same way as the demand of a group of people of different orders of wealth for a commodity, which is serviceable in only one use, is the aggregate of the demands of each member of the group. Again, just as the demand of the rich for peas is considerable even at a very high price, but loses all elasticity at a price that is still high relatively to the consumption of the poor; so the demand of the individual for water to drink is considerable even at a very high price, but loses all elasticity at a price that is still high relatively to his demand for it for the purpose of cleaning up the house. And as the aggregate of a number of demands on the part of different classes of people for peas retains elasticity over a larger range of price than will that of any one individual, so the demand of an individual for water for many uses retains elasticity over a larger range of prices than his demand for it for any one use. Compare an article by J. B. Clark on A Universal Law of Economic Variation in the Harvard Journal of Economics, Vol. VIII.

When a statistical table shows the gradual growth of the consumption of a commodity over a long series of years, we may want to compare the percentage by which it increases in different years. This can be done pretty easily with a little practice. But when the figures are expressed in the form of a statistical diagram, it cannot easily be done, without translating the diagram back into figures; and this is a cause of the disfavour in which many statisticians hold the graphic method. But by the knowledge of one simple rule the balance can be turned, so far as this point goes, in favour of the graphic method. The rule is as follows:—Let the quantity of a commodity consumed (or of trade carried, or of tax levied etc.) be measured by horizontal lines parallel to Ox, fig. (9), while the corresponding years are in the usual manner ticked off in descending order at equal distances along Oy. To measure the rate of growth at any point P, put a ruler to touch the curve at P. Let it meet Oy in t, and let N be the point on Oy at the same vertical height as P: then the number of years marked off along Oy by the distance Nt is the inverse of the fraction by which the amount is increasing annually. That is, if Nt is 20 years, the amount is increasing at the rate of 1/20, i.e. of 5 per cent. annually; if Nt is 25 years, the increase is 1/25 or 4 per cent. annually; and so on. See a paper by the present writer in the Jubilee number of the Journal of the London Statistical Society, June 1885; also Note IV, in the Mathematical Appendix.

For illustrations of the influence of fashion see articles by Miss Foley in the Economic Journal, Vol. III., and Miss Heather Bigg in the Nineteenth Century, Vol. XXIII.

In examining the effects of taxation, it is customary to compare the amounts entered for consumption just before and just after the imposition of the tax. But this is untrustworthy. For dealers anticipating the tax lay in large stocks just before it is imposed, and need to buy very little for some time afterwards. And vice versâ when a tax is lowered. Again, high taxes lead to false returns. For instance, the nominal importation of molasses into Boston increased fiftyfold in consequence of the tax being lowered by the Rockingham Ministry in 1766, from 6d. to 1d. per gallon. But this was chiefly due to the fact that with the tax at 1d., it was cheaper to pay the duty than to smuggle.

A single table made out by the great statistician Engel for the consumption of the lower, middle and working classes in Saxony in 1857, may be quoted here; because it has acted as a guide and a standard of comparison to later inquiries. It is as follows:—

Information bearing on the subject was collected long ago by Harrison, Petty, Cantillon (whose lost Supplement seems to have contained some workmen's budgets), Arthur Young, Malthus and others. Working-men's budgets were collected by Eden at the end of the last century; and there is much miscellaneous information on the expenditure of the working classes in subsequent Reports of Commissions on Poor-relief, Factories, etc. Indeed almost every year sees some important addition from public or private sources to our information on these subjects.

It may be noted that the method of le Play's monumental Les Ouvriers Européens is the intensive study of all the details of the domestic life of a few carefully chosen families. To work it well requires a rare combination of judgment in selecting cases, and of insight and sympathy in interpreting them. At its best, it is the best of all: but in ordinary hands it is likely to suggest more untrustworthy general conclusions, than those obtained by the extensive method of collecting more rapidly very numerous observations, reducing them as far as possible to statistical form, and obtaining broad averages in which inaccuracies and idiosyncrasies may be trusted to counteract one another to some extent.

Book III, Chapter V

Our illustration belongs indeed properly to domestic production rather than to domestic consumption. But that was almost inevitable; for there are very few things ready for immediate consumption which are available for many different uses. And the doctrine of the distribution of means between different uses has less important and less interesting applications in the science of demand than in that of supply. See e.g. V. III. 3.

The working-class budgets which were mentioned in Ch. IV. § 8 may render most important services in helping people to distribute their resources wisely between different uses, so that the marginal utility for each purpose shall be the same. But the vital problems of domestic economy relate as much to wise action as to wise spending. The English and the American housewife make limited means go a less way towards satisfying wants than the French housewife does, not because they do not know how to buy, but because they cannot produce as good finished commodities out of the raw material of inexpensive joints, vegetables etc., as she can. Domestic economy is often spoken of as belonging to the science of consumption: but that is only half true. The greatest faults in domestic economy, among the sober portion of the Anglo-Saxon working-classes at all events, are faults of production rather than of consumption.

In classifying some pleasures as more urgent than others, it is often forgotten that the postponement of a pleasurable event may alter the circumstances under which it occurs, and therefore alter the character of the pleasure itself. For instance it may be said that a young man discounts at a very high rate the pleasure of the Alpine tours which he hopes to be able to afford himself when he has made his fortune. He would much rather have them now, partly because they would give him much greater pleasure now.

It is important to remember that, except on these assumptions there is no direct connection between the rate of discount on the loan of money, and the rate at which future pleasures are discounted. A man may be so impatient of delay that a certain promise of a pleasure ten years hence will not induce him to give up one close at hand which he regards as a quarter as great. And yet if he should fear that ten years hence money may be so scarce with him (and its marginal utility therefore so high) that half-a-crown then may give him more pleasure or save him more pain than a pound now, he will save something for the future even though he have to hoard it, on the same principle that he might store eggs for the winter. But we are here straying into questions that are more closely connected with Supply than with Demand. We shall have to consider them again from different points of view in connection with the Accumulation of Wealth, and later again in connection with the causes that determine the Rate of Interest.

If the probability that a pleasure will be enjoyed is three to one, so that three chances out of four are in its favour, the value of its expectation is three-fourths of what it would be if it were certain: if the probability that it will be enjoyed were only seven to five, so that only seven chances out of twelve are in its favour, the value of its expectation is only seven-twelfths of what it would be if the event were certain, and so on. [This is its actuarial value: but further allowance may have to be made for the fact that the true value to anyone of an uncertain gain is generally less than its actuarial value (see the note on p. 209).] If the anticipated pleasure is both uncertain and distant, we have a twofold deduction to make from its full value. We will suppose, for instance, that a person would give 10s. for a gratification if it were present and certain, but that it is due a year hence, and the probability of its happening then is three to one. Suppose also that he discounts the future at the rate of twenty per cent. per annum. Then the value to him of the anticipation of it is 3/4 × 80/100 × 10s. i.e. 6s. Compare the Introductory chapter of Jevons' Theory of Political Economy.

Of course this estimate is formed by a rough instinct; and in any attempt to reduce it to numerical accuracy (see Note V. in the Appendix), we must recollect what has been said, in this and the preceding Section, as to the impossibility of comparing accurately pleasures or other satisfactions that do not occur at the same time; and also as to the assumption of uniformity involved in supposing the discount of future pleasures to obey the exponential law.

This term is a familiar one in German economics, and meets a need which is much felt in English economics. For "opportunity" and "environment," the only available substitutes for it, are sometimes rather misleading. By Conjunctur, says Wagner (Grundegung, Ed. III. p. 387), "we understand the sum total of the technical, economic, social and legal conditions; which, in a mode of national life (Volkswirthschaft) resting upon division of labour and private property,—especially private property in land and other material means of production—determine the demand for and supply of goods, and therefore their exchange value: this determination being as a rule, or at least in the main, independent of the will of the owner, of his activity and his remissness."

Some further explanations may be given of this statement; though in fact they do little more than repeat in other words what has already been said. The significance of the condition in the text that he buys the second pound of his own free choice is shown by the consideration that if the price of 14s. had been offered to him on the condition that he took two pounds, he would then have to elect between taking one pound for 20s. or two pounds for 28s.: and then his taking two pounds would not have proved that he thought the second pound worth more than 8s. to him. But as it is, he takes a second pound paying 14s. unconditionally for it; and that proves that it is worth at least 14s. to him. (If he can get buns at a penny each, but seven for sixpence; and he elects to buy seven, we know that he is willing to give up his sixth penny for the sake of the sixth and the seventh buns: but we cannot tell how much he would pay rather than go without the seventh bun only.)

The first pound was probably worth to him more than 20s. All that we know is that it was not worth less to him. He probably got some small surplus even on that. Again, the second pound was probably worth more than 14s. to him. All that we know is that it was worth at least 14s. and not worth 20s. to him. He would get therefore at this stage a surplus satisfaction of at least 6s., probably a little more. A ragged edge of this kind, as mathematicians are aware, always exists when we watch the effects of considerable changes, as that from 20s. to 14s. a pound. If we had begun with a very high price, had descended by practically infinitesimal changes of a farthing per pound, and watched infinitesimal variations in his consumption of a small fraction of a pound at a time, this ragged edge would have disappeared.

Prof. Nicholson (Principles of Political Economy, Vol. I and Economic Journal, Vol. IV.) has raised objections to the notion of consumers' surplus, which have been answered by Prof. Edgeworth in the same Journal. Prof. Nicholson says:—"Of what avail is it to say that the utility of an income of (say) £100 a year is worth (say) £1000 a year?" There would be no avail in saying that. But there might be use, when comparing life in Central Africa with life in England, in saying that, though the things which money will buy in Central Africa may on the average be as cheap there as here, yet there are so many things which cannot be bought there at all, that a person with a thousand a year there is not so well off as a person with three or four hundred a year here. If a man pays 1d. toll on a bridge, which saves him an additional drive that would cost a shilling, we do not say that the penny is worth a shilling, but that the penny together with the advantage offered him by the bridge (the part it plays in his conjuncture) is worth a shilling for that day. Were the bridge swept away on a day on which he needed it, he would be in at least as bad a position as if he had been deprived of eleven pence.

Let us then consider the demand curve DD' for tea in any large market.

Let OH be the amount which is sold there at the price HA annually, a year being taken as our unit of time. Taking any point M in OH let us draw MP vertically upwards to meet the curve in P and cut a horizontal line through A in R. We will suppose the several lbs. numbered in the order of the eagerness of the several purchasers: the eagerness of the purchaser of any lb. being measured by the price he is just willing to pay for that lb. The figure informs us that OM can be sold at the price PM; but that at any higher price not quite so many lbs. can be sold. There must be then some individual who will buy more at the price PM, than he will at any higher price; and we are to regard the OMth lb. as sold to this individual. Suppose for instance that PM represents 4s., and that OM represents a million lbs. The purchaser described in the text is just willing to buy his fifth lb of tea at the price 4s., and the OMth or millionth lb. may be said to be sold to him. If AH and therefore RM represent 2s., the consumers' surplus derived from the OMth lb. is the excess of PM or 4s. which the purchaser of that lb. would have been willing to pay for it over RM the 2s. which he actually does pay for it. Let us suppose that a very thin vertical parallelogram is drawn of which the height is PM and of which the base is the distance along Ox that measures the single unit or lb. of tea. It will be convenient henceforward to regard price as measured not by a mathematical straight line without thickness, as PM; but by a very thin parallelogram, or as it may be called a thick straight line, of which the breadth is in every case equal to the distance along Ox which measures a unit or lb. of tea. Thus we should say that the total satisfaction derived from the OMth lb. of tea is represented (or, on the assumption made in the last paragraph of the text is measured) by the thick straight line MP; that the price paid for this lb. is represented by the thick straight line MR and the consumers' surplus derived from this lb. by the thick straight line RP. Now let us suppose that such thin parallelograms, or thick straight lines, are drawn from all positions of M between O and H, one for each lb. of tea. The thick straight lines thus drawn, as MP is, from Ox up to the demand curve will each represent the aggregate of the satisfaction derived from a lb. of tea; and taken together thus occupy and exactly fill up the whole area DOHA. Therefore we may say that the area DOHA represents the aggregate of the satisfaction derived from the consumption of tea. Again, each of the straight lines drawn, as MR is, from Ox upwards as far as AC represents the price that actually is paid for a lb. of tea. These straight lines together make up the area COHA; and therefore this area represents the total price paid for tea. Finally each of the straight lines drawn as RP is from AC upwards as far as the demand curve, represents the consumers' surplus derived from the corresponding lb. of tea. These straight lines together make up the area DCA; and therefore this area represents the total consumers' surplus that is derived from tea when the price is AH. But it must be repeated that this geometrical measurement is only an aggregate of the measures of benefits which are not all measured on the same scale except on the assumption just made in the text. Unless that assumption is made the area only represents an aggregate of satisfactions, the several amounts of which are not exactly measured. On that assumption only, its area measures the volume of the total net satisfaction derived from the tea by its various purchasers.

Harris On Coins 1757, says "Things in general are valued, not according to their real uses in supplying the necessities of men; but rather in proportion to the land, labour and skill that are requisite to produce them. It is according to this proportion nearly, that things or commodities are exchanged one for another; and it is by the said scale, that the intrinsic values of most things are chiefly estimated. Water is of great use, and yet ordinarily of little or no value; because in most places, water flows spontaneously in such great plenty, as not to be withheld within the limits of private property; but all may have enough, without other expense than that of bringing or conducting it, when the case so requires. On the other hand, diamonds being very scarce, have upon that account a great value, though they are but little use."

There might conceivably be persons of high sensibility who would suffer specially from the want of either salt or tea: or who were generally sensitive, and would suffer more from the loss of a certain part of their income than others in the same station of life. But it would be assumed that such differences between individuals might be neglected, since we were considering in either case the average of large numbers of people; though of course it might be necessary to consider whether there were some special reason for believing, say, that those who laid most store by tea were a specially sensitive class of people. If it could, then a separate allowance for this would have to be made before applying the results of economical analysis to practical problems of ethics or politics.

Some ambiguous phrases in earlier editions appear to have suggested to some readers the opposite opinion. But the task of adding together the total utilities of all commodities, so as to obtain the aggregate of the total utility of all wealth, is beyond the range of any but the most elaborate mathematical formulæ. An attempt to treat it by them some years ago convinced the present writer that even if the task be theoretically feasible, the result would be encumbered by so many hypotheses as to be practically useless.

Prof. Patten has insisted on the latter of them in some able and suggestive writings. But his attempt to express the aggregate utility of all forms of wealth seems to overlook many difficulties.

In mathematical language the neglected elements would generally belong to the second order of small quantities; and the legitimacy of the familiar scientific method by which they are neglected would have seemed beyond question, had not Prof. Nicholson challenged it. A short reply to him has been given by Prof. Edgeworth in the Economic Journal for March 1894; and a fuller reply by Prof. Barone in the Giornale degli Economisti for Sept. 1894; of which some account is given by Mr Sanger in the Economic Journal for March 1895.

The notion of consumers' surplus may help us a little now; and, when our statistical knowledge is further advanced, it may help us a great deal to decide how much injury would be done to the public by an additional tax of 6d. a pound on tea, or by an addition of ten per cent. to the freight charges of a railway: and the value of the notion is but little diminished by the fact that it would not help us much to estimate the loss that would be caused by a tax of 30s. a pound on tea, or a tenfold rise in freight charges.

There is however a special difficulty in estimating the whole of the utility of commodities some supply of which is necessary for life. If any attempt is made to do it, the best plan is perhaps to take that necessary supply for granted, and estimate the total utility only of that part of the commodity which is in excess of this amount. But we must recollect that the desire for anything is much dependent on the difficulty of getting substitutes for it. (See Note VI. in the Mathematical Appendix.)

See Note VII. in the Appendix.

That is to say, if £30 represent necessaries, a person's satisfaction from his income will begin at that point; and when it has reached £40, an additional £1 will add a tenth to the £10 which represents its happiness-yielding power. But if his income were £100, that is £70 above the level of necessaries, an additional £7 would be required to add as much to his happiness as £1 if his income were £40: while if his income were £10,000, an additional £1000 would be needed to produce an equal effect (compare Note VIII. in the Appendix). Of course such estimates are very much at random, and unable to adapt themselves to the varying circumstances of individual life. As we shall see later, the systems of taxation which are now most widely prevalent follow generally on the lines of Bernoulli's suggestion. Earlier systems took from the poor very much more than would be in accordance with that plan; while the systems of graduated taxation, which are being foreshadowed in several countries, are in some measure based on the assumption that the addition of one per cent. to a very large income adds less to the wellbeing of its owner than an addition of one per cent. to smaller incomes would, even after Bernoulli's correction for necessaries has been made.

See his lecture on The Gospel of Relaxation.

Labour is classed as economic when it is "undergone partly or wholly with a view to some good other than the pleasure directly derived from it." See p. 65 and footnote. Such labour with the head as does not tend directly or indirectly to promote material production, as for instance the work of the schoolboy at his tasks, is left out of account, so long as we are confining our attention to production in the ordinary sense of the term. From some points of view, but not from all, the phrase Land, Labour, Capital would be more symmetrical if labour were interpreted to mean the labourers, i.e. mankind. See Walras, Économic Politique Pure, Leçon 17, and Prof. Fisher, Economic Journal, VI. p. 529.

We have seen (p. 124) that, if a person makes the whole of his purchases at the price which he would be just willing to pay for his last purchases, he gains a surplus of satisfaction on his earlier purchases; since he gets them for less than he would have paid rather than go without them. So, if the price paid to him for doing any work is an adequate reward for that part which he does most unwillingly; and if, as generally happens, the same payment is given for that part of the work which he does less unwillingly and at less real cost to himself; then from that part he obtains a producer's surplus. Some difficulties connected with this notion are considered in Appendix K.

Theory of Political Economy, Ch. V. This doctrine has been emphasized and developed in much detail by Austrian and American economists.

See above III. III. 4.

See Book II. Chapter III.

In Ricardo's famous phrase "the original and indestructible powers of the soil." Von Thünen, in a noteworthy discussion of the basis of the theory of rent, and of the positions which Adam Smith and Ricardo took with regard to it, speaks of "Der Boden an sich"; a phrase which unfortunately cannot be translated, but which means the soil as it would be by itself, if not altered by the action of man (Der Isolirte Staat, I. i. 5).

But see the latter part of IV. III. 8; also IV. XIII. 2.

Increasing return in the earlier stages arises partly from economy of organization, similar to that which gives an advantage to manufacture on a large scale. But it is also partly due to the fact that where land is very slightly cultivated the farmer's crops are apt to be smothered by nature's crops of weeds. The relation between Diminishing and Increasing Return is discussed further in the last chapter of this Book.

"The land was not able to bear them, that they might dwell together: for their substance was great, so that they could not dwell together." Genesis xiii. 6.

As to this term see the Note at the end of the chapter.

Ricardo was well aware of this: though he did not emphasize it enough. Those opponents of his doctrine who have supposed that it has no application to places where all the land pays a rent, have mistaken the nature of his argument.

An illustration from recorded experiments may help to make clearer the notion of the return to a marginal dose of capital and labour. The Arkansas experimental station (see The Times, 18 Nov. 1889) reported that four plots of an acre each were treated exactly alike except in the matter of ploughing and harrowing, with the following result:—

Let us seek a graphical illustration. It is to be remembered that graphical illustrations are not proofs. They are merely pictures corresponding very roughly to the main conditions of certain real problems. They obtain clearness of outline, by leaving out of account many considerations which vary from one practical problem to another, and of which the farmer must take full account in his own special case. If on any given field there were expended a capital of £50, a certain amount of produce would be raised from it: a certain amount larger than the former would be raised if there were expended on it a capital of £51. The difference between these two amounts may be regarded as the produce due to the fifty-first pound; and if we suppose the capital to be applied in successive doses of £1 each we may speak of this difference as the produce due to the fifty-first dose. Let the doses be represented in order by successive equal divisions of the line OD. Let there now be drawn from the division of this line representing the fifty-first dose M, a line MP at right angles to OD, in thickness equal to the length of one of the divisions, and such that its length represents the amount of the produce due to the fifty-first dose. Suppose this done for each separate division up to that corresponding to the last dose which it is found profitable to put on the land. Let this last dose be the 110th at D, and DC the corresponding return that only just remunerates the farmer. The extremities of such lines will lie on a curve APC. The gross produce will be represented by the sum of these lines: i.e., since the thickness of each line is equal to the length of the division on which it stands, by the area ODCA. Let CGH be drawn parallel to DO, cutting PM in G; then MG is equal to CD; and since DC just remunerates the farmer for one dose, MG will just remunerate him for another: and so for all the portions of the thick vertical lines cut off between OD and HC. Therefore the sum of these, that is, the area ODCH, represents the share of the produce that is required to remunerate him; while the remainder, AHGCPA, is the surplus produce, which under certain conditions becomes the rent.

That is, we may substitute (fig. 11) the dotted line BA' for BA and regard A'BPC as the typical curve for the return to capital and labour applied in English agriculture. No doubt crops of wheat and some other annuals cannot be raised at all without some considerable labour. But natural grasses which sow themselves will yield a good return of rough cattle to scarcely any labour.

This case may be represented by diagrams. If the produce rises in real value in the ratio of OH' to OH (so that the amount required to remunerate the farmer for a dose of capital and labour has fallen from OH to OH'), the surplus produce rises only to AH'C', which is not very much greater than its old amount AHC, fig. 12, representing the first case.

In such a case as this the earlier doses are pretty sure to be sunk in the land; and the actual rent paid, if the land is hired out, will then include profits on them in addition to the surplus produce or true rent thus shown. Provision can easily be made in the diagrams for the returns due to the landlord's capital.

Of course his return may diminish and then increase and then diminish again; and yet again increase when he is in a position to carry out some further extensive change, as was represented by fig. 11. But more extreme instances, of the kind represented by fig. 15, are not very rare.

If the price of produce is such that an amount of it OH (figs. 12, 13, 14) is required to pay the cultivator for one dose of capital and labour, the cultivation will be carried as far as D; and the produce raised, AODC, will be greatest in fig. 12, next greatest in fig. 13, and least in fig. 14. But if the demand for agricultural produce so rises that OH' is enough to repay the cultivator for a dose, the cultivation will be carried as far as D', and the produce raised will be AOD'C', which is greatest in fig. 14, next in fig. 13, and least in fig. 12. The contrast would have been even stronger if we had considered the surplus produce which remains after deducting what is sufficient to repay the cultivator, and which becomes under some conditions the rent of the land. For this is AHCin figs. 12 and 13 in the first case and AH'C' in the second; while in fig. 14 it is in the first case the excess of AODCPA over ODCH, i.e. the excess of PEC over AHE; and in the second case the excess of PE'C' over AH'E'.

Rogers (Six Centuries of Work and Wages, p. 73) calculates that rich meadow had about the same value, estimated in grain, five or six centuries ago as it has now; but that the value of arable land, similarly estimated, has increased about fivefold in the same time. This is partly due to the great importance of hay at a time when roots and other modern kinds of winter food for cattle were unknown.

Thus we may compare two pieces of land represented in figs. 16 and 17, with regard to which the law of diminishing return acts in a similar way, so that their produce curves have similar shapes, but the former has a higher fertility than the other for all degrees of intensity of cultivation. The value of the land may generally be represented by its surplus produce or rent, which is in each case represented by AHC when OH is required to repay a dose of capital and labour; and by AH'C' when the growth of numbers and wealth have made OH' sufficient. It is clear that AH'C' in fig. 17 bears a more favourable comparison with AH'C' in fig. 16 than does AHC in fig. 17 with AHC in fig. 16. In the same way, though not to the same extent, the total produce AOD'C' in fig. 17 bears a more favourable comparison with AOD'C' in fig. 16, than does AODC in fig. 17 with AODC in fig. 16. (It is ingeniously argued in Wicksteed's Coordinates of Laws of Distribution, pp. 51, 2 that rent may be negative. Of course taxes may absorb rent: but land which will not reward the plough will grow trees or rough grass. See above, pp. 157, 8.)

As Roscher says (Political Economy, Sect. CLV.), "In judging Ricardo, it must not be forgotten that it was not his intention to write a text-book on the science of Political Economy, but only to communicate to those versed in it the result of his researches in as brief a manner as possible. Hence he writes so frequently making certain assumptions, and his words are to be extended to other cases only after due consideration, or rather re-written to suit the changed case."

Carey claims to have proved that "in every quarter of the world cultivation has commenced on the sides of the hills where the soil was poorest, and where the natural advantages of situation were the least. With the growth of wealth and population, men have been seen descending from the high lands bounding the valley on either side, and coming together at its feet." (Principles of Social Science, chap. IV. § 4.) He has even argued that whenever a thickly peopled country is laid waste, "whenever population, wealth, and the power of association decline, it is the rich soil that is abandoned by men who fly again to the poor ones" (Ib. ch. V. § 3); the rich soils being rendered difficult and dangerous by the rapid growth of jungles which harbour wild beasts and banditti, and perhaps by malaria. The experience of more recent settlers in South Africa and elsewhere does not however generally support his conclusions, which are indeed based largely on facts relating to warm countries. But much of the apparent attractiveness of tropical countries is delusive: they would give a very rich return to hard work: but hard work in them is impossible at present, though some change in this respect may be made by the progress of medical and especially bacteriological science. A cool refreshing breeze is as much a necessary of vigorous life as food itself. Land that offers plenty of food but whose climate destroys energy, is not more productive of the raw material of human wellbeing, than land that supplies less food but has an invigorating climate.

In a new country an important form of this assistance is to enable him to venture on rich land that he would have otherwise shunned, through fear of enemies or of malaria.

As Ricardo says (Principles, chap. II.) "The compensation given (by the lessee) for the mine or quarry is paid for the value of the coal or stone which can be removed from them, and has no connection with the original or indestructible powers of the land." But both he and others seem sometimes to lose sight of these distinctions in discussing the law of diminishing return in its application to mines. Especially is this the case in Ricardo's criticism of Adam Smith's theory of rent (Principles, chap. XXIV.).

Of course the return to capital spent in building increases for the earlier doses. Even where land can be had for almost nothing, it is cheaper to build houses two stories high than one; and hitherto it has been thought cheapest to build factories about four stories high. But a belief is growing up in America, that where land is not very dear factories should be only two stories high, partly in order to avoid the evil effects of vibration, and of the expensive foundations and walls required to prevent it in a high building: that is, it is found that the return of accommodation diminishes perceptibly after the capital and labour required to raise two stories have been spent on the land.

See also the writings of Professors Bullock and Landry.

In this he will make large use of what is called below the "Substitution" of more for less appropriate means. Discussions bearing directly on this paragraph will be found in III. V. 1-3: IV. VII. 8; and XIII. 2: V. III. 3; IV. 1-4; V. 6-8; VIII. 1-5; X. 3: VI. I. 7; and II. 5.

The labour-part of the dose is of course current agricultural labour; the capital-part is itself also the product of labour in past times rendered by workers of many kinds and degrees, accompanied by "waiting."

See IV. I. 1.

Thus Aristotle (Politics, II. 6) objects to Plato's scheme for equalizing property and abolishing poverty on the ground that it would be unworkable unless the State exercised a firm control over the growth of numbers. And as Jowett points out, Plato himself was aware of this (see Laws, v. 740: also Aristotle, Politics, VII. 16). The opinion, formerly held that the population of Greece declined from the seventh century B.C., and that of Rome from the third, has recently been called in question, see "Die Bevölkerung des Altertums" by Edouard Meyer in the Handwörterbuch der Staatswissenschaften.

Political Economy, § 254.

He argues that Holland is richer than it appears to be relatively to France, because its people have access to many advantages that cannot be had by those who live on poorer land, and are therefore more scattered. "Rich land is better than coarse land of the same Rent." Political Arithmetick, ch. I.

Discourses on Trade, ch. X. Harris, Essay on Coins, pp. 32, 3, argues to a similar effect, and proposes to "encourage matrimony among the lower classes by giving some privileges to those who have children," etc.

"Let us," said Pitt, "make relief, in cases where there are a large number of children, a matter of right and an honour, instead of a ground for opprobrium and contempt. This will make a large family a blessing and not a curse, and this will draw a proper line of distinction between those who are able to provide for themselves by labour, and those who after having enriched their country with a number of children have a claim on its assistance for their support." Of course he desired "to discourage relief where it was not wanted." Napoleon the First had offered to take under his own charge one member of any family which contained seven male children; and Louis XIV., his predecessor in the slaughter of men, had exempted from public taxes all those who married before the age of 20 or had more than ten legitimate children. A comparison of the rapid increase in the population of Germany with that of France was a chief motive of the order of the French Chamber in 1885 that education and board should be provided at the public expense for every seventh child in necessitous families: and in 1913 a law was passed giving bounties under certain conditions to parents of large families. The British Budget Bill of 1909 allowed a small abatement of income tax for fathers of families.

The Physiocratic doctrine with regard to the tendency of population to increase up to the margin of subsistence may be given in Turgot's words:—the employer "since he always has his choice of a great number of working men, will choose that one who will work most cheaply. Thus then the workers are compelled by mutual competition to lower their price; and with regard to every kind of labour the result is bound to be reached—and it is reached as a matter of fact—that the wages of the worker are limited to that which is necessary to procure his subsistence." (Sur la formation et la distribution des richesses, § VI.)

See Wealth of Nations, Bk. I. Ch. VIII. and Bk. V. ch. II. See also supra, Bk. II ch. IV.

The average price of wheat in the decade 1771-1780 in which Adam Smith wrote was 34s. 7d.; in 1781-1790 it was 37s. 1d.; in 1791-1800 it was 63s. 6d.; in 1801-1810 it was 83s. 11d.; and in 1811-1820 it was 87s. 6d.

Early in the last century the Imperial taxes—for the greater part war taxes—amounted to one-fifth of the whole income of the country; whereas now they are not much more than a twentieth, and even of this a great part is spent on education and other benefits which Government did not then afford.

See below § 7 and above Bk. I. ch. III. §§ 5, 6.

Especially Godwin in his Inquiry concerning Political Justice (1792). It is interesting to compare Malthus' criticism of this Essay (Bk. III. ch. II.) with Aristotle's comments on Plato's Republic (see especially Politics, II. 6).

But many of his critics suppose him to have stated his position much less unreservedly than he did; they have forgotten such passages as this:—"From a review of the state of society in former periods compared with the present I should certainly say that the evils resulting from the principle of population have rather diminished than increased, even under the disadvantage of an almost total ignorance of their real cause. And if we can indulge the hope that this ignorance will be gradually dissipated, it does not seem unreasonable to hope that they will be still further diminished. The increase of absolute population, which will of course take place, will evidently tend but little to weaken this expectation, as everything depends on the relative proportions between population and food, and not on the absolute number of the people. In the former part of this work it appeared that the countries which possessed the fewest people often suffered the most from the effects of the principle of population." Essay, Bk. IV. ch. XII.

In the first edition of his essay, 1798, Malthus gave his argument without any detailed statement of facts, though from the first he regarded it as needing to be treated in direct connection with a study of facts; as is shown by his having told Pryme (who afterwards became the first Professor of Political Economy at Cambridge) "that his theory was first suggested to his mind in an argumentative conversation which he had with his father on the state of some other countries" (Pryme's Recollections, p. 66). American experience showed that population if unchecked would double at least once in twenty-five years. He argued that a doubled population might, even in a country as thickly peopled as England was with its seven million inhabitants, conceivably though not probably double the subsistence raised from the English soil: but that labour doubled again would not suffice to double the produce again. "Let us then take this for our rule, though certainly far beyond the truth; and allow that the whole produce of the island might be increased every twenty-five years [that is with every doubling of the population] by a quantity of subsistence equal to that which it at present produces"; or in other words, in an arithmetical progression. His desire to make himself clearly understood made him, as Wagner says in his excellent introduction to the study of Population (Grundlegung, Ed. 3, p. 453), "put too sharp a point on his doctrine, and formulate it too absolutely." Thus he got into the habit of speaking of production as capable of increasing in an arithmetical ratio: and many writers think that he attached importance to the phrase itself: whereas it was really only a short way of stating the utmost that he thought any reasonable person could ask him to concede. What he meant, stated in modern language, was that the tendency to diminishing return, which is assumed throughout his argument, would begin to operate sharply after the produce of the island had been doubled. Doubled labour might give doubled produce: but quadrupled labour would hardly treble it: octupled labour would not quadruple it.

Taking the present population of the world at one and a half thousand millions; and assuming that its present rate of increase (about 8 per 1000 annually, see Ravenstein's paper before the British Association in 1890) will continue, we find that in less than two hundred years it will amount to six thousand millions; or at the rate of about 200 to the square mile of fairly fertile land (Ravenstein reckons 28 million square miles of fairly fertile land, and 14 millions of poor grass lands. The first estimate is thought by many to be too high: but, allowing for this, if the less fertile land be reckoned in for what it is worth, the result will be about thirty million square miles as assumed above). Meanwhile there will probably be great improvements in the arts of agriculture; and, if so, the pressure of population on the means of subsistence may be held in check for about two hundred years, but not longer.

Of course the length of a generation has itself some influence on the growth of population. If it is 25 years in one place and 20 in another; and if in each place population doubles once in two generations during a thousand years, the increase will be a million-fold in the first place, but thirty million-fold in the second.

Dr Ogle (Statistical Journal, Vol. 53) calculates that if the average age of marriage of women in England were postponed five years, the number of children to a marriage, which is now 4.2 would fall to 3.1. Korösi, basing himself on the facts of the relatively warm climate of Buda Pest, finds 18-20 the most prolific age for women, 24-26 that for men. But he concludes that a slight postponement of weddings beyond these ages is advisable mainly on the ground that the vitality of the children of women under 20 is generally small. See Proceedings of Congress of Hygiene and Demography, London 1892, and Statistical Journal, Vol. 57.

The term marriage in the text must be taken in a wide sense so as to include not only legal marriages, but all those informal unions which are sufficiently permanent in character to involve for several years at least the practical responsibilities of married life. They are often contracted at an early age, and not infrequently lead up to legal marriages after the lapse of some years. For this reason the average age at marriage in the broad sense of the term, with which alone we are here concerned, is below the average age at legal marriage. The allowance to be made on this head for the whole of the working classes is probably considerable; but it is very much greater in the case of unskilled labourers than of any other class. The following statistics must be interpreted in the light of this remark, and of the fact that all English industrial statistics are vitiated by the want of sufficient care in the classification of the working classes in our official returns. The Registrar-General's forty-ninth Annual Report states that in certain selected districts the returns of marriages for 1884-5 were examined with the following results; the number after each occupation being the average age of bachelors in it at marriage, and the following number, in brackets, being the average age of spinsters who married men of that occupation:—Miners 24.06 (22.46); Textile hands 24.38 (23.43); Shoemakers, Tailors 24.92 (24.31); Artisans 25.35 (23.70); Labourers 25.56 (23.66); Commercial Clerks 26.25 (24.43); Shopkeepers, Shopmen 26.67 (24.22); Farmers and sons 29.23 (26.91); Professional and Independent Class 31.22 (26.40).

Thus a visit to the valley Jachenau in the Bavarian Alps about 1880 found this custom still in full force. Aided by a great recent rise in the value of their woods, with regard to which they had pursued a farseeing policy, the inhabitants lived prosperously in large houses, the younger brothers and sisters acting as servants in their old homes or elsewhere. They were of a different race from the workpeople in the neighbouring valleys, who lived poor and hard lives, but seemed to think that the Jachenau purchased its material prosperity at too great a cost.

See e.g. Rogers, Six Centuries, pp. 106, 7.

The extreme prudence of peasant proprietors under stationary conditions was noticed by Malthus; see his account of Switzerland (Essay, Bk. II. ch. V.). Adam Smith remarked that poor Highland women frequently had twenty children of whom not more than two reached maturity (Wealth of Nations, Bk. I. ch. VIII.); and the notion that want stimulated fertility was insisted on by Doubleday, True Law of Population. See also Sadler, Law of Population. Herbert Spencer seemed to think it probable that the progress of civilization will of itself hold the growth of population completely in check. But Malthus' remark, that the reproductive power is less in barbarous than in civilized races, has been extended by Darwin to the animal and vegetable kingdom generally.

The birth-rate in England and Wales is nominally diminishing at about an equal rate in both town and country. But the continuous migration of young persons from rural to industrial areas has considerably depleted the ranks of young married women in the rural districts; and, when allowance is made for this fact, we find that the percentage of births to women of childbearing ages is much higher in them than in the towns: as is shown in the following table published by the Registrar-General in 1907.

The movements of the population of France have been studied with exceptiona care: and the great work on the subject by Levasseur, La Population Française, is a mine of valuable information as regards other nations besides France. Montesquieu, reasoning perhaps rather a priori, accused the law of primogeniture which ruled in his time in France of reducing the number of children in a family: and le Play brought the same charge against the law of compulsory division. Levasseur (l.c. Vol. III. pp. 171-7) calls attention to the contrast; and remarks that Malthus' expectations of the effect of the Civil Code on population were in harmony with Montesquieu's rather than le Play's diagnosis. But in fact the birthrate varies much from one part of France to another. It is generally lower where a large part of the population owns land than where it does not. If however the Departments of France be arranged in groups in ascending order of the property left at death (valeurs successorales par tête d'habitant), the corresponding birth-rate descends almost uniformly, being 23 per hundred married women between 15 and 50 years for the ten Departments in which the property left is 48-57 fr.; and 13.2 for the Seine, where it is 412 fr. And in Paris itself the arrondissements inhabited by the well-to-do show a smaller percentage of families with more than two children than the poorer arrondissements show. There is much interest in the careful analysis which Levasseur gives of the connection between economic conditions and birth-rate; his general conclusion being that it is not direct but indirect, through the mutual influence of the two on manners and the habit of life (mœurs). He appears to hold that, however much the decline in the numbers of the French relatively to surrounding nations may be regretted from the political and military points of view, there is much good mixed with the evil in its influences on material comfort and even social progress.

Thus we are told that after the Black Death of 1349 most marriages were very fertile (Rogers, History of Agriculture and Prices. Vol. I. p. 301).

There is no certain knowledge to be had as to the density of population in England before the eighteenth century; but the following estimates, reproduced from Steffen (Geschichte der englischen Lohn-arbeiter, I. pp. 463 ff.), are probably the best as yet available. Domesday Book suggests that in 1086 the population of England was between two, and two-and-a-half millions. Just before the Black Death (1348) it may have been between three-and-a-half, and four-and-a-half millions; and just afterwards two-and-a-half millions. It began to recover quickly; but made slow progress between 1400 and 1550: it increased rather fast in the next hundred years, and reached five-and-a-half millions in 1700.

The Black Death was England's only very great calamity. She was not, like the rest of Europe, liable to devastating wars, such as the Thirty Years' War, which destroyed more than half the population of Germany, a loss which it required a full century to recover. (See Rümelin's instructive article on Bevölkerungslehre in Schönberg's Handbuch.)

Adam Smith is justly indignant at this. (See Wealth of Nations, Bk. I. ch. X. Part II. and Book IV. ch. II.) The Act recites (14 Charles II. c. 12, A.D. 1662) that "by reason of some defects in the law, poor people are not restrained from going from one parish to another, and thereby do endeavour to settle themselves in those parishes where there is the best stock, the largest wastes or commons to build cottages, and the most woods for them to burn and destroy: etc." and it is therefore ordered "that upon complaint made ... within forty days after any such person or persons coming, so as to settle as aforesaid, in any tenement under the yearly value of ten pounds ... it shall be lawful for any two justices of the Peace ... to remove and convey such person or persons to such parish where he or they were last legally settled." Several Acts purporting to soften its harshness had been passed before Adam Smith's time; but they had been ineffective. In 1795 however it was ordered that no one should be removed until he became actually chargeable.

Some interesting remarks on this subject are made by Eden, History of the Poor, I. pp. 560-4.

But this increase in the figures shown is partly due to improved registration of births. (Farr, Vital Statistics, p. 97.)

The following tables show the growth of the population of England and Wales from the beginning of the eighteenth century. The figures before 1801 are computed from the registers of births and deaths, and the poll and hearth tax returns: those since 1801 from Census returns. It will be noticed that the numbers increased nearly as much in the twenty years following 1760 as in the preceding sixty years. The pressure of the great war and the high price of corn is shown in the slow growth between 1790 and 1801; and the effects of indiscriminate poor law allowances, in spite of greater pressure, is shown by the rapid increase in the next ten years, and the still greater increase when that pressure was removed in the decade ending 1821. The third column shows the percentage which the increase during the preceding decade was of the population at the beginning of that decade.

See Farr's 17th Annual Report for 1854 as Registrar-General, or the abstract of it in Vital Statistics (pp. 72-5).

For instance, representing the price of wheat in shillings and the number of marriages in England and Wales in thousands, we have for 1801 wheat at 119 and marriages at 67, for 1803 wheat at 59 and marriages at 94; for 1805 the numbers are 90 and 80, for 1807 they are 75 and 84, for 1812 they are 126 and 82, for 1815 they are 66 and 100, for 1817 they are 97 and 88, for 1822 they are 45 and 99.

Since 1820 the average price of wheat has seldom exceeded 60s. and never 75s.: and the successive inflations of commerce which culminated and broke in 1826, 1836-9, 1848, 1856, 1866 and 1873 exercised an influence on the marriage-rate about equal with changes in the price of corn. When the two causes act together the effects are very striking: thus between 1829 and 1834, there was a recovery of prosperity accompanied by a steady fall in the price of wheat and marriages rose from a hundred and four to a hundred and twenty-one thousand. The marriage-rate rose again rapidly between 1842 and 1845 when the price of wheat was a little lower than in the preceding years, and the business of the country was reviving; and again under similar circumstances between 1847 and 1853 and between 1862 and 1865.

Statistics of exports are among the most convenient indications of the fluctuations of commercial credit and industrial activity: and in the article already quoted, Ogle has shown a correspondence between the marriage-rate and the exports per head. Compare diagrams in Vol. II. p. 12 of Levasseur's La Population Française; and with regard to Massachusetts by Willcox in the Political Science Quarterly, Vol. VIII. pp. 76-82. Ogle's inquiries have been extended and corrected in a paper read by R. H. Hooker before the Manchester Statistical Society, in January 1898; who points out that if the marriage-rate fluctuates, the birth-rate during an ascending phase of the marriage-rate is apt to correspond to the marriage-rate not for that phase, but for the preceding phase when the marriage-rate was declining: and vice versâ. "Hence the ratio of births to marriages declines when the marriage-rate is rising and rises when the marriage-rate falls. A curve representing the ratio of births to marriages will move inversely to the marriage-rate." He points out that the decline in the ratio of births to marriages is not great, and is accounted for by the rapid decline of illegitimate births. The ratio of legitimate births to marriages is not declining perceptibly.

The following statements are based chiefly on statistics arranged by the late Signor Bodio, by M. Levasseur, La Population Française, and by the English Registrar-General in his Report for 1907.

Much instructive and suggestive matter connected with the subject of this chapter is contained in the Statistical Memoranda and Charts relating to Public Health and Social Conditions published by the Local Government Board in 1909 [Cd. 4671.].

This measure can be applied directly to most kinds of navvies' and porters' work, and indirectly to many kinds of agricultural work. In a controversy that was waged after the great agricultural lock-out as to the relative efficiency of unskilled labour in the South and North of England, the most trustworthy measure was found in the number of tons of material that a man would load into a cart in a day. Other measures have been found in the number of acres reaped or mown, or the number of bushels of corn reaped, etc.: but these are unsatisfactory, particularly for comparing different conditions of agriculture: since the implements used, the nature of the crop and the mode of doing the work all vary widely. Thus nearly all comparisons between mediæval and modern work and wages based on the wages of reaping, mowing, etc. are valueless until we have found means to allow for the effects of changes in the methods of agriculture. It costs for instance less labour than it did to reap by hand a crop that yields a hundred bushels of corn; because the implements used are better than they were: but it may not cost less labour to reap an acre of corn; because the crops are heavier than they were.

This must be distinguished from nervousness, which, as a rule, indicates a general deficiency of nervous strength; though sometimes it proceeds from nervous irritability or want of balance. A man who has great nervous strength in some directions may have but little in others; the artistic temperament in particular often develops one set of nerves at the expense of others: but it is the weakness of some of the nerves, not the strength of the others, that leads to nervousness. The most perfect artistic natures seem not to have been nervous: Leonardo da Vinci and Shakespeare for example. The term "nervous strength" corresponds in some measure to Heart in Engel's great division of the elements of efficiency into (a) Body, (b) Reason, and (c) Heart (Leib, Verstand und Herz). He classifies activities according to the permutations a, ab, ac, abc, acb; b, ba, bc, bca, bac; c, ca, cb, cab, cba: the order in each case being that of relative importance, and a letter being omitted where the corresponding element plays only a very small part.

A warm climate impairs vigour. It is not altogether hostile to high intellectual and artistic work: but it prevents people from being able to endure very hard exertion of any kind for a long time. More sustained hard work can be done in the cooler half of the temperate zone than anywhere else; and most of all in places such as England and her counterpart New Zealand, where sea-breezes keep the temperature nearly uniform. The summer heats and winter colds of many parts of Europe and America, where the mean temperature is moderate, have the effect of shortening the year for working purposes by about two months. Extreme and sustained cold is found to dull the energies, partly perhaps because it causes people to spend much of their time in close and confined quarters: inhabitants of the Arctic regions are generally incapable of long-continued severe exertion. In England popular opinion has insisted that a "warm Yule-tide makes a fat churchyard"; but statistics prove beyond question that it has the opposite effect: the average mortality is highest in the coldest quarter of the year, and higher in cold winters than in warm.

Race history is a fascinating but disappointing study for the economist: for conquering races generally incorporated the women of the conquered; they often carried with them many slaves of both sexes during their migrations, and slaves were less likely than freemen to be killed in battle or to adopt a monastic life. In consequence nearly every race had much servile, that is mixed blood in it: and as the share of servile blood was largest in the industrial classes, a race history of industrial habits seems impossible.

This was proved by Farr, who eliminated disturbing causes by an instructive statistical device (Vital Statistics, p. 139).

Freedom and hope increase not only man's willingness but also his power for work; physiologists tell us that a given exertion consumes less of the store of nervous energy if done under the stimulus of pleasure than of pain: and without hope there is no enterprise. Security of person and property are two conditions of this hopefulness and freedom; but security always involves restraints on freedom, and it is one of the most difficult problems of civilization to discover how to obtain the security which is a condition of freedom without too great a sacrifice of freedom itself. Changes of work, of scene, and of personal associations bring new thoughts, call attention to the imperfections of old methods, stimulate a "divine discontent," and in every way develop creative energy.

By converse with others who come from different places, and have different customs, travellers learn to put on its trial many a habit of thought or action which otherwise they would have always acquiesced in as though it were a law of nature. Moreover, a shifting of places enables the more powerful and original minds to find full scope for their energies and to rise to important positions: whereas those who stay at home are often over much kept in their places. Few men are prophets in their own land; neighbours and relations are generally the last to pardon the faults and to recognize the merits of those who are less docile and more enterprising than those around them. It is doubtless chiefly for this reason that in almost every part of England a disproportionately large share of the best energy and enterprise is to be found among those who were born elsewhere.

The rate of mortality is low among ministers of religion and schoolmasters; among the agricultural classes, and in some other industries such as those of wheelwrights, shipwrights and coal-miners. It is high in lead and tin mining, in file-making and earthenware manufacture. But neither these nor any other regular trade show as high a rate of mortality as is found among London general labourers and costermongers; while the highest of all is that of servants in inns. Such occupations are not directly injurious to health, but they attract those who are weak in physique and in character and they encourage irregular habits. A good account of the influence of occupation on death-rates is given in the supplement to the forty-fifth (1885) Annual Report of the Registrar-General, pp. xxv-lxiii. See also Farr's Vital Statistics, pp. 392-411, Humphreys' paper on Class Mortality Statistics in the Statistical Journal for June 1887, and the literature of the Factory Acts generally.

Davenant (Balance of Trade, A.D. 1699, p. 20), following Gregory King, proves that according to official figures. London has an excess of deaths over births of 2000 a year, but an immigration of 5000; which is more than half of what he calculates, by a rather risky method, to be the true net increase of the population of the country. He reckons that 530,000 people live in London, 870,000 in the other cities and market towns, and 4,100,000 in villages and hamlets. Compare these figures with the census of 1901 for England and Wales; where we find London with a population of over 4,500,000; five more towns with an average of over 500,000; and sixty-nine more exceeding 50,000 with an average of over 100,000. Nor is this all: for many suburbs whose population is not counted in, are often really parts of the big towns; and in some cases the suburbs of several adjacent towns run into one another, making them all into one gigantic, though rather scattered town. A suburb of Manchester is counted as a large town with 220,000 inhabitants; and the same is true of West Ham, a suburb of London with 275,000. The boundaries of some large towns are extended at irregular intervals to include such suburbs: and consequently the true population of a large town may be growing fast, while its nominal population grows slowly or even recedes, and then suddenly leaps forwards. Thus the nominal population of Liverpool was 552,000 in 1881; 518,000 in 1891; and 685,000 in 1901.

It must be recollected that the characteristics of town life increase in intensity for good and for evil with every increase in the size of a town, and its suburbs. Fresh country air has to pass over many more sources of noisome vapour before it reaches the average Londoner than before it reaches the average inhabitant of a small town. The Londoner has generally to go far before he can reach the freedom and the restful sounds and sights of the country. London therefore with 4,500,000 inhabitants adds to the urban character of England's life far more than a hundred times as much as a town of 45,000 inhabitants.

For reason of this kind Welton (Statistical Journal, 1897) makes the extreme proposal to omit all persons between 15 and 35 years of age in comparing the rates of mortality in different towns. The mortality of females in London between the ages of fifteen and thirty-five is, chiefly for this reason, abnormally low. If however a town has a stationary population its vital statistics are more easily interpreted; and selecting Coventry as a typical town, Galton has calculated that the adult children of artisan townsfolk are little more than half as numerous as those of labouring people who live in healthy country districts. When a place is decaying, the young and strong and hearty drift away from it; leaving the old and the infirm behind them, and consequently the birth-rate is generally low. On the other hand, a centre of industry that is attracting population is likely to have a very high birth-rate, because it has more than its share of people in the full vigour of life. This is especially the case in the coal and iron towns, partly because they do not suffer, as the textile towns do, from a deficiency of males; and partly because miners as a class marry early. In some of them, though the death-rate is high, the excess of the birth-rate over it exceeds 20 per thousand of the population. The death-rate is generally highest in towns of the second order, chiefly because their sanitary arrangements are not yet as good as those of the very largest towns.

See an article entitled "Where to House the London Poor" by the present writer in the Contemporary Review, Feb. 1884.

In the Southern States of America, manual work became disgraceful to the white man; so that, if unable to have slaves himself, he led a paltry degenerate life, and seldom married. Again, on the Pacific Slope, there were at one time just grounds for fearing that all but highly skilled work would be left to the Chinese; and that the white men would live in an artificial way in which a family became a great expense. In this case Chinese lives would have been substituted for American, and the average quality of the human race would have been lowered.

The extent of the infant mortality that arises from preventable causes may be inferred from the facts that the percentage of deaths under one year of age to births is generally about a third as much again in urban as in rural districts; and yet in many urban districts which have a well-to-do population it is lower than the average for the whole country (Registrar-General's Report for 1905, pp. xlii-xlv). A few years ago it was found that, while the annual death-rate of children under five years of age was only about two per cent. in the families of peers and was less than three per cent. for the whole of the upper classes, it was between six and seven per cent. for the whole of England. On the other hand Prof. Leroy Beaulieu says that in France the parents of but one or two children are apt to indulge them, and be over-careful about them to the detriment of their boldness, enterprise and endurance. (See Statistical Journal, Vol. 54, pp. 378, 9.)

In this connection it is worth while to notice that the full importance of an epoch-making idea is often not perceived in the generation in which it is made: it starts the thoughts of the world on a new track, but the change of direction is not obvious until the turning-point has been left some way behind. In the same way the mechanical inventions of every age are apt to be underrated relatively to those of earlier times. For a new discovery is seldom fully effective for practical purposes till many minor improvements and subsidiary discoveries have gathered themselves around it: an invention that makes an epoch is very often a generation older than the epoch which it makes. Thus it is that each generation seems to be chiefly occupied in working out the thoughts of the preceding one; while the full importance of its own thoughts is as yet not clearly seen.

According to Galton the statement that all great men have had great mothers goes too far: but that shows only that the mother's influence does not outweigh all others; not that it is not greater than any one of them. He says that the mother's influence is most easily traceable among theologians and men of science, because an earnest mother leads her child to feel deeply about great things; and a thoughtful mother does not repress, but encourages that childish curiosity which is the raw material of scientific habits of thought.

There are many fine natures among domestic servants. But those who live in very rich houses are apt to get self-indulgent habits, to overestimate the importance of wealth, and generally to put the lower aims of life above the higher, in a way that is not common with independent working people. The company in which the children of some of our best houses spend much of their time, is less ennobling than that of the average cottage. Yet in these very houses, no servant who is not specially qualified, is allowed to take charge of a young retriever or a young horse.

The absence of a careful general education for the children of the working classes, has been hardly less detrimental to industrial progress than the narrow range of the old grammar-school education of the middle classes. Till recently indeed it was the only one by which the average schoolmaster could induce his pupils to use their minds in anything higher than the absorption of knowledge. It was therefore rightly called liberal, because it was the best that was to be had. But it failed in its aim of familiarizing the citizen with the great thoughts of antiquity; it was generally forgotten as soon as school-time was over; and it raised an injurious antagonism between business and culture. Now however the advance of knowledge is enabling us to use science and art to supplement the curriculum of the grammar-school, and to give to those who can afford it an education that develops their best faculties, and starts them on the track of thoughts which will most stimulate the higher activities of their minds in after-life. The time spent on learning to spell is almost wasted: if spelling and pronunciation are brought into harmony in the English language as in most others, about a year will be added to the effective school education without any additional cost.

As Nasmyth says; if a lad, having dropped two peas at random on a table, can readily put a third pea midway in a line between them, he is on the way to become a good mechanic. Command over eye and hand is gained in the ordinary English games, no less than in the playful work of the Kinder-garten. Drawing has always been on the border line between work and play.

One of the weakest points of technical education is that it does not educate the sense of proportion and the desire for simplicity of detail. The English, and to an even greater extent, the Americans, have acquired in actual business the faculty of rejecting intricacies in machinery and processes, which are not worth what they cost, and practical instinct of this kind often enables them to succeed in competition with Continental rivals who are much better educated.

A good plan is that of spending the six winter months of several years after leaving school in learning science in College, and the six summer months as articled pupils in large workshops. The present writer introduced this plan about forty years ago at University College, Bristol (now the University of Bristol). But it has practical difficulties which can be overcome only by the cordial and generous co-operation of the heads of large firms with the College authorities. Another excellent plan is that adopted in the school attached to the works of Messrs Mather and Platt at Manchester. "The drawings made in the school are of work actually in progress in the shops. One day the teacher gives the necessary explanations and calculations, and the next day the scholars see, as it were on the anvil, the very thing which has been the subject of his lecture."

The employer binds himself to see that the apprentice is thoroughly taught in the workshop all the subdivisions of one great division of his trade, instead of letting him learn only one of these subdivisions, as too often happens now. The apprentice's training would then often be as broad as if he had been taught the whole of the trade as it existed a few generations ago; and it might be supplemented by a theoretical knowledge of all branches of the trade, acquired in a technical school. Something resembling the old apprenticeship system has recently come into vogue for young Englishmen who desire to learn the business of farming under the peculiar conditions of a new country: and there are some signs that the plan may be extended to the business of farming in this country, for which it is in many respects admirably adapted. But there remains a great deal of education suitable to the farmer and to the farm-labourer which can best be given in agricultural colleges and dairy schools.

The heads of almost every progressive firm on the Continent have carefully studied processes and machinery in foreign lands. The English are great travellers; but partly perhaps on account of their ignorance of other languages they seem hardly to set enough store on the technical education that can be gained by the wise use of travel.

In fact every designer in a primitive age is governed by precedent: only very daring people depart from it; even they do not depart far, and their innovations are subjected to the test of experience, which, in the long run, is infallible. For though the crudest and most ridiculous fashions in art and in literature will be accepted by the people for a time at the bidding of their social superiors, nothing but true artistic excellence has enabled a ballad or a melody, a style of dress or a pattern of furniture to retain its popularity among a whole nation for many generations together. These innovations, then, which were inconsistent with the true spirit of art were suppressed, and those that were on the right track were retained, and became the starting-point for further progress; and thus traditional instincts played a great part in preserving the purity of the industrial arts in Oriental countries, and to a less extent in mediæval Europe.

French designers find it best to live in Paris: if they stay for long out of contact with the central movements of fashion they seem to fall behindhand. Most of them have been educated as artists, but have failed of their highest ambition. It is only in exceptional cases, as for instance for the Sèvres china, that those who have succeeded as artists find it worth their while to design. Englishmen can, however, hold their own in designing for Oriental markets, and there is evidence that the English are at least equal to the French in originality, though they are inferior in quickness in seeing how to group forms and colours so as to obtain an effective result. (See the Report on Technical Education, Vol. I. pp. 256, 261, 324, 325 and Vol. III. pp. 151, 152, 202, 203, 211 and passim.) It is probable that the profession of the modern designer has not yet risen to the best position which it is capable of holding. For it has been to a disproportionate extent under the influence of one nation; and that nation is one whose works in the highest branches of art have seldom borne to be transplanted. They have indeed often been applauded and imitated at the time by other nations, but they have as yet seldom struck a key-note for the best work of later generations.

The painters themselves have put on record in the portrait-galleries the fact that in mediæval times, and even later, their art attracted a larger share of the best intellect than it does now; when the ambition of youth is tempted by the excitement of modern business, when its zeal for imperishable achievements finds a field in the discoveries of modern science, and, lastly, when a great deal of excellent talent is insensibly diverted from high aims by the ready pay to be got by hastily writing half-thoughts for periodical literature.

Mill was so much impressed by the difficulties that beset a parent in the attempt to bring up his son to an occupation widely different in character from his own, that he said (Principles, II. XIV. 2):—"So complete, indeed, has hitherto been the separation, so strongly marked the line of demarcation, between the different grades of labourers, as to be almost equivalent to an hereditary distinction of caste; each employment being chiefly recruited from the children of those already employed in it, or in employments of the same rank with it in social estimation, or from the children of persons who, if originally of a lower rank, have succeeded in raising themselves by their exertions. The liberal professions are mostly supplied by the sons of either the professional or the idle classes: the more highly skilled manual employments are filled up from the sons of skilled artisans or the class of tradesmen who rank with them: the lower classes of skilled employments are in a similar case; and unskilled labourers, with occasional exceptions, remain from father to son in their pristine condition. Consequently the wages of each class have hitherto been regulated by the increase of its own population, rather than that of the general population of the country." But he goes on, "The changes, however, now so rapidly taking place in usages and ideas are undermining all these distinctions."

Mill's classification had lost a great part of its value when Cairnes adopted it (Leading Principles, p. 72). A classification more suited to our existing conditions is offered by Giddings (Political Science Quarterly, Vol. II. pp. 69-71). It is open to the objection that it draws broad lines of division where nature has made no broad lines; but it is perhaps as good as any division of industry into four grades can be. His divisions are (i) automatic manual labour, including common labourers and machine tenders; (ii) responsible manual labour, including those who can be entrusted with some responsibility and labour of self-direction; (iii) automatic brain workers, such as book-keepers, and (iv) responsible brain workers, including the superintendents and directors.

The conditions and methods of the large and incessant movement of the population upwards and downwards from grade to grade are studied more fully below, VI. IV. V. and VII.

The growing demand for boys to run errands, and to do other work that has no educational value, has increased the danger that parents may send their sons into avenues that have no outlook for good employment in later years: and something is being done by public agency, and more by the devotion and energy of men and women in unofficial association, in giving out notes of warning against such "blind alley" occupations, and assisting lads to prepare themselves for skilled work. These efforts may be of great national value. But care must be taken that this guidance and help is as accessible to the higher strains of the working class population when in need of it as to the lower; lest the race should degenerate.

Book IV, Chapter VII

A short but suggestive study of the growth of wealth in its early forms, and of the arts of life, is given in Tylor's Anthropology.

Bagehot (Economic Studies, pp. 163-5), after quoting the evidence which Galton has collected on the keeping of pet animals by savage tribes, points out that we find here a good illustration of the fact that however careless a savage race may be for the future, it cannot avoid making some provision for it. A bow, a fishing-net, which will do its work well in getting food for to-day must be of service for many days to come: a horse or a canoe that will carry one well to-day, must be a stored-up source of many future enjoyments. The least provident of barbaric despots may raise a massive pile of buildings, because it is the most palpable proof of his present wealth and power.

The farm implements for a first class Ryot family, including six or seven adult males, are a few light ploughs and hoes chiefly of wood, of the total value of about 13 rupees (Sir G. Phear, Aryan Village, p. 233) or the equivalent of their work for about a month; while the value of the machinery alone on a well equipped large modern arable farm amounts to £3 an acre (Equipment of the Farm, edited by J. C. Morton) or say a year's work for each person employed. They include steam-engines, trench, subsoil and ordinary ploughs, some to be worked by steam and some by horse power; various grubbers, harrows, rollers, clod-crushers, seed and manure drills, horse hoes, rakes, hay-making, mowing and reaping machines, steam or horse threshing, chaff cutting, turnip cutting, hay-pressing machines and a multitude of others. Meanwhile there is an increasing use of silos and covered yards, and constant improvements in the fittings of the dairy and other farm buildings, all of which give great economy of effort in the long run, but require a larger share of it to be spent in preparing the way for the direct work of the farmer in raising agricultural produce.

For instance, improvements which have recently been made in some American cities indicate that by a sufficient outlay of capital each house could be supplied with what it does require, and relieved of what it does not, much more effectively than now, so as to enable a large part of the population to live in towns and yet be free from many of the present evils of town life. The first step is to make under all the streets large tunnels, in which many pipes and wires can be laid side by side, and repaired when they get out of order, without any interruption of the general traffic and without great expense. Motive power, and possibly even heat, might then be generated at great distances from the towns (in some cases in coal-mines), and laid on wherever wanted. Soft water and spring water, and perhaps even sea water and ozonized air, might be laid on in separate pipes to nearly every house; while steam-pipes might be used for giving warmth in winter, and compressed air for lowering the heat of summer; or the heat might be supplied by gas of great heating power laid on in special pipes, while light was derived from gas specially suited for the purpose or from electricity; and every house might be in electric communication with the rest of the town. All unwholesome vapours, including those given off by any domestic fires which were still used, might be carried away by strong draughts through long conduits, to be purified by passing through large furnaces and thence away through huge chimneys into the higher air. To carry out such a scheme in the towns of England would require the outlay of a much larger capital than has been absorbed by our railways. This conjecture as to the ultimate course of town improvement may be wide of the truth; but it serves to indicate one of very many ways in which the experience of the past foreshadows broad openings for investing present effort in providing the means of satisfying our wants in the future.

Comp. Appendix A.

They "discount" future benefits (comp. Book III. ch. v. § 3) at the rate of many thousands per cent. per annum.

Comp. III. v. 2.

Comp. Principles of Political Economy, by Richard Jones.

It must however be admitted that what passes by the name of public property is often only private wealth borrowed on a mortgage of future public revenue. Municipal gas-works for instance are not generally the results of public accumulations. They were built with wealth saved by private persons, and borrowed on public account.

Above, III. v.

The suggestion that the rate of interest may conceivably become a negative quantity was discussed by Foxwell in a paper on Some Social Aspects of Banking, read before the Bankers' Institute in January, 1886.

Karl Marx and his followers have found much amusement in contemplating the accumulations of wealth which result from the abstinence of Baron Rothschild, which they contrast with the extravagance of a labourer who feeds a family of seven on seven shillings a week; and who, living up to his full income, practises no economic abstinence at all. The argument that it is Waiting rather than Abstinence, which is rewarded by Interest and is a factor of production, was given by Macvane in the Harvard Jóurnal of Economics for July, 1887.

See also VI. VI. It may however be observed here that the dependence of the growth of capital on the high estimation of "future goods" appears to have been over-estimated by earlier writers; not under-estimated, as is argued by Prof. Böhm-Bawerk.

See a brilliant paper by Häckel on Arbeitstheilung in Menschen- und Thierleben and Schäffle's Bau und Leben des socialen Körpers.

Like all other doctrines of the same class, this requires to be interpreted in the light of the fact that the effective demand of a purchaser depends on his means, as well as on his wants: a small want on the part of a rich man often has more effective force in controlling the business arrangements of the world than a great want on the part of a poor man.

See above I. IV. 8; and below Appendix B, 3 and 6.

Man with his many motives, as he may set himself deliberately to encourage the growth of one peculiarity, may equally set himself to check the growth of another: the slowness of progress during the Middle Ages was partly due to a deliberate detestation of learning.

See Note XI. in the Mathematical Appendix. Considerations of this class have little application to the development of mere animals, such as mice; and none at all to that of peas and other vegetables. And therefore the marvellous arithmetical results which have been established, provisionally at all events, in regard to heredity in such cases, have very little bearing on the full problems of inheritance with which students of social science are concerned: and some negative utterances on this subject by eminent Mendelians seem to lack due reserve. Excellent remarks on the subject will be found in Prof. Pigou's Wealth and Welfare, Part I, ch. IV.

Compare Appendix A, 16.

For instance, the first time a man attempts to skate he must give his whole attention to keeping his balance, his cerebrum has to exercise a direct control over every movement, and he has not much mental energy left for other things. But after a good deal of practice the action becomes semi-automatic, the local nerve centres undertake nearly all the work of regulating the muscles, the cerebrum is set free, and the man can carry on an independent train of thought; he can even alter his course to avoid an obstacle in his path, or to recover his balance after it has been disturbed by a slight unevenness, without in any way interrupting the course of his thoughts. It seems that the exercise of nerve force under the immediate direction of the thinking power residing in the cerebrum has gradually built up a set of connections, involving probably distinct physical change, between the nerves and nerve centres concerned; and these new connections may be regarded as a sort of capital of nerve force. There is probably something like an organized bureaucracy of the local nerve centres: the medulla, the spinal axis, and the larger ganglia generally acting the part of provincial authorities, and being able after a time to regulate the district and village authorities without troubling the supreme government. Very likely they send up messages as to what is going on: but if nothing much out of the way has happened, these are very little attended to. When however a new feat has to be accomplished, as for instance learning to skate backwards, the whole thinking force will be called into requisition for the time; and will now be able by aid of the special skating-organization of the nerves and nerve centres, which has been built up in ordinary skating, to do what would have been altogether impossible without such aid.

J. S. Mill went so far as to maintain that his occupations at the India Office did not interfere with his pursuit of philosophical inquiries. But it seems probable that this diversion of his freshest powers lowered the quality of his best thought more than he was aware; and though it may have diminished but little his remarkable usefulness in his own generation, it probably affected very much his power of doing that kind of work which influences the course of thought in future generations. It was by husbanding every atom of his small physical strength that Darwin was enabled to do so much work of just that kind: and a social reformer who had succeeded in exploiting Darwin's leisure hours in useful work on behalf of the community, would have done a very bad piece of business for it.

The best and most expensive clothes are made by highly skilled and highly paid tailors, each of whom works right through first one garment and then another: while the cheapest and worst clothes are made for starvation wages by unskilled women who take the cloth to their own homes and do every part of the sewing themselves. But clothes of intermediate qualities are made in workshops or factories, in which the division and subdivision of labour are carried as far as the size of the staff will permit; and this method is rapidly gaining ground at both ends at the expense of the rival method. Lord Lauderdale (Inquiry, p. 282) quotes Xenophon's argument that the best work is done when each confines himself to one simple department, as when one man makes shoes for men, and another for women; or better when one man only sews shoes or garments, another cuts them out: the king's cooking is much better than anybody else's, because he has one cook who only boils, another who only roasts meat; one who only boils fish, another who only fries it: there is not one man to make all sorts of bread but a special man for special qualities.

One great inventor is rumoured to have spent £300,000 on experiments relating to textile machinery, and his outlay is said to have been abundantly returned to him. Some of his inventions were of such a kind as can be made only by a man of genius; and however great the need, they must have waited till the right man was found for them. He charged not unreasonably £1000 as royalty for each of his combing machines; and a worsted manufacturer, being full of work, found it worth his while to buy an additional machine, and pay this extra charge for it, only six months before the expiry of the patent. But such cases are exceptional: as a rule, patented machines are not very dear. In some cases the economy of having them all produced at one place by special machinery has been so great that the patentee has found it to his advantage to sell them at a price lower than the old price of the inferior machines which they displaced: for that old price gave him so high a profit, that it was worth his while to lower the price still further in order to induce the use of the machines for new purposes and in new markets. In almost every trade many things are done by hand, though it is well known that they could easily be done by some adaptations of machines that are already in use in that or some other trade, and which are not made only because there would not as yet be enough employment for them to remunerate the trouble and expense of making them.

Smiles' Boulton and Watt, pp. 170, 1.

The system owes its origin in great measure to Sir Joseph Whitworth's standard gauges; but it has been worked out with most enterprise and thoroughness in America. Standardization is most helpful in regard to things which are to be built up with others into complex machines, buildings, bridges, etc.

The perfection which the machinery has already attained is shown by the fact that at the Inventions Exhibition held in London in 1885, the representative of an American watch factory took to pieces fifty watches before some English representatives of the older system of manufacture, and after throwing the different parts into different heaps, asked them to select for him one piece from each heap in succession; he then set these pieces up in one of the watch-cases and handed them back a watch in perfect order.

"The type-founder was probably the first to secede from the concern; then printers delegated to others the making of presses; afterwards the ink and the rollers found separate and distinct manufacturers; and there arose a class of persons who, though belonging to other trades, made printing appliances a speciality, such as printers' smiths, printers' joiners and printers' engineers" (Mr Southward in the Article on Typography in the Encyclopædia Britannica).

For instance, Mr Southward tells us "a minder may understand only book machines or only news machines; he may know all about" machines that print from flat surfaces or those that print from cylinders; "or of cylinders he may know only one kind. Entirely novel machines create a new class of artisans. There are men perfectly competent to manage a Walter press who are ignorant how to work two-colour or fine book-work machines. In the compositor's department division of labour is carried out to a still minuter degree. An old-fashioned printer would set up indifferently a placard, a title-page, or a book. At the present day we have jobbing hands, book hands, and news hands, the word 'hand' suggesting the factory-like nature of the business. There are jobbing hands who confine themselves to posters. Book hands comprise those who set up the titles and those who set up the body of the work. Of these latter again, while one man composes, another, the 'maker-up,' arranges the pages."

Let us follow still further the progress of machinery in supplanting manual labour in some directions and opening out new fields for its employment in others. Let us watch the process by which large editions of a great newspaper are set up and printed off in a few hours. To begin with, a good part of the type-setting is itself often done by a machine; but in any case the types are in the first instance on a plane surface, from which it is impossible to print very rapidly. The next step therefore is to make a papier-maché cast of them, which is bent on to a cylinder, and is then used as the mould from which a new metal plate is cast that fits the cylinders of the printing machine. Fixed on these it rotates alternately against the inking cylinders and the paper. The paper is arranged in a huge roll at the bottom of the machine and unrolls itself automatically, first against the damping cylinders and then against the printing cylinders, the first of which prints it on one side, and the second on the other: thence to the cutting cylinders, which cut it into equal lengths, and thence to the folding apparatus, which folds it ready for sale.

The jack-plane, used for making smooth large boards for floors and other purposes, used to cause heart disease, making carpenters as a rule old men by the time they were forty. Adam Smith tells us that "workmen, when they are liberally paid, are very apt to overwork themselves and to ruin their health and constitution in a few years. A carpenter in London, and in some other places, is not supposed to last in his utmost vigour above eight years.... Almost every class of artificers is subject to some particular infirmity occasioned by excessive application to their peculiar species of work." Wealth of Nations, Book I. chapter VII.

The efficiency of labour in weaving has been increased twelve-fold and that in spinning six-fold during the last seventy years. In the preceding seventy years the improvements in spinning had already increased the efficiency of labour two-hundred-fold (see Ellison's Cotton Trade of Great Britain, ch. IV. and V.).

Perhaps the textile industries afford the best instance of work that used to be done by hand and is now done by machinery. They are especially prominent in England, where they give employment to nearly half a million males and more than half a million females, or more than one in ten of those persons who are earning independent incomes. The strain that is taken off human muscles in dealing even with those soft materials is shown by the fact that for every one of these million operatives there is used about one horse-power of steam, that is, about ten times as much as they would themselves exert if they were all strong men; and the history of these industries will serve to remind us that many of those who perform the more monotonous parts of manufacturing work are as a rule not skilled workers who have come down to it from a higher class of work, but unskilled workers who have risen to it. A great number of those who work in the Lancashire cotton-mills have come there from poverty-stricken districts of Ireland, while others are the descendants of paupers and people of weak physique, who were sent there in large numbers early in the last century from the most miserable conditions of life in the poorest agricultural districts, where the labourers were fed and housed almost worse than the animals whom they tended. Again, when regret is expressed that the cotton factory hands of New England have not the high standard of culture which prevailed among them a century ago, we must remember that the descendants of those factory workers have moved up to higher and more responsible posts, and include many of the ablest and wealthiest of the citizens of America. Those who have taken their places are in the process of being raised; they are chiefly French Canadians and Irish, who though they may learn in their new homes some of the vices of civilization, are yet much better off and have on the whole better opportunities of developing the higher faculties of themselves and their children than they had in their old homes.

Thus in the records of the Stourbridge Fair held near Cambridge we find an endless variety of light and precious goods from the older seats of civilization in the East and on the Mediterranean; some having been brought in Italian ships, and others having travelled by land as far as the shores of the North Sea.

Not very long ago travellers in western Tyrol could find a strange and characteristic relic of this habit in a village called Imst. The villagers had somehow acquired a special art in breeding canaries: and their young men started for a tour to distant parts of Europe each with about fifty small cages hung from a pole over his shoulder, and walked on till they had sold all.

There are for instance over 500 villages devoted to various branches of woodwork; one village makes nothing but spokes for the wheels of vehicles, another nothing but the bodies and so on; and indications of a like state of things are found in the histories of oriental civilizations and in the chronicles of mediæval Europe. Thus for instance we read (Rogers' Six Centuries of Work and Wages, ch. IV.) of a lawyer's handy book written about 1250, which makes note of scarlet at Lincoln; blanket at Bligh; burnet at Beverley; russet at Colchester; linen fabrics at Shaftesbury, Lewes, and Aylsham; cord at Warwick and Bridport; knives at Marstead; needles at Wilton; razors at Leicester; soap at Coventry; horse girths at Doncaster; skins and furs at Chester and Shrewsbury and so on.

The later wanderings of the iron industry from Wales, Staffordshire and Shropshire to Scotland and the North of England are well shown in the tables submitted by Sir Lowthian Bell to the recent Commission on the Depression of Trade and Industry. See their Second Report, Part I. p. 320.

Fuller says that Flemings started manufactures of cloths and fustians in Norwich, of baizes in Sudbury, of serges in Colchester and Taunton, of cloths in Kent, Gloucestershire, Worcestershire, Westmorland, Yorkshire, Hants, Berks and Sussex, of kerseys in Devonshire and of Levant cottons in Lancashire. Smiles' Huguenots in England and Ireland, p. 109. See also Lecky's History of England in the eighteenth century, ch. II.

The movement has been specially conspicuous in the case of the textile manufacturers. Manchester, Leeds and Lyons are still chief centres of the trade in cotton, woollen and silk stuffs, but they do not now themselves produce any great part of the goods to which they owe their chief fame. On the other hand London and Paris retain their positions as the two largest manufacturing towns of the world, Philadelphia coming third. The mutual influences of the localization of industry, the growth of towns and habits of town life, and the development of machinery are well discussed in Hobson's Evolution of Capitalism.

Comp. Hobson, l. c. p. 114.

The percentage of the population occupied in the textile industries in the United Kingdom fell from 3.13 in 1881 to 2.43 in 1901; partly because much of the work done by them has been rendered so simple by semi-automatic machinery that it can be done fairly well by peoples that are in a relatively backward industrial condition; and partly because the chief textile goods retain nearly the same simple character as they had thirty or even three thousand years ago. On the other hand manufactures of iron and steel (including shipbuilding) have increased so greatly in complexity as well as in volume of output, that the percentage of the population occupied in them rose from 2.39 in 1881 to 3.01 in 1901; although much greater advance has been meanwhile made in the machinery and methods employed in them than in the textile group. The remaining manufacturing industries employed about the same percentage of the people in 1901 as in 1881. In the same time the tonnage of British shipping cleared from British ports increased by one half; and the number of dock labourers doubled, but that of seamen has slightly diminished. These facts are to be explained partly by vast improvements in the construction of ships and all appliances connected with them, and partly by the transference to dock labourers of nearly all tasks connected with handling the cargo some of which were even recently performed by the crew. Another marked change is the increased aggregate occupation of women in manufactures, though that of married women appears to have diminished, and that of children has certainly diminished greatly.

The Summary Tables of the Census of 1911, published in 1915, show so many changes in classification since 1901 that no general view of recent developments can be safely made. But Table 64 of that Report and Prof. D. Caradog Jones' paper read before the Royal Statistical Society in December 1914 show that the developments of 1901-1911 differ from their predecessors in detail rather than in general character.

"Manufacture" is a term which has long lost any connection with its original use: and is now applied to those branches of production where machine and not hand work is most prominent. Roscher made the attempt to bring it back nearer to its old use by applying it to domestic as opposed to factory industries: but it is too late to do this now.

See Babbage's instance of the manufacture of horn. Economy of Manufactures, ch. XXII.

Instances are the utilization of the waste from cotton, wool, silk and other textile materials; and of the by-products in the metallurgical industries, in the manufacture of soda and gas, and in the American mineral oil and meat packing industries.

See the preceding chapter, § 3.

The average time which a machine will last before being superseded is in many trades not more than fifteen years, while in some it is ten years or even less. There is often a loss on the use of a machine unless it earns every year twenty per cent. on its cost; and when the operation performed by such a machine costing £500 adds only a hundredth part to the value of the material that passes through it—and this is not an extreme case—there will be a loss on its use unless it can be applied in producing at least £10,000 worth of goods annually.

In many businesses only a small percentage of improvements are patented. They consist of many small steps, which it would not be worth while to patent one at a time. Or their chief point lies in noticing that a certain thing ought to be done; and to patent one way of doing it, is only to set other people to work to find out other ways of doing it against which the patent cannot guard. If one patent is taken out, it is often necessary to "block" it, by patenting other methods of arriving at the same result; the patentee does not expect to use them himself, but he wants to prevent others from using them. All this involves worry and loss of time and money: and the large manufacturer prefers to keep his improvement to himself and get what benefit he can by using it. While if the small manufacturer takes out a patent, he is likely to be harassed by infringements: and even though he may win "with costs" the actions in which he tries to defend himself, he is sure to be ruined by them if they are numerous. It is generally in the public interest that an improvement should be published, even though it is at the same time patented. But if it is patented in England and not in other countries, as is often the case, English manufacturers may not use it, even though they were just on the point of finding it out for themselves before it was patented; while foreign manufacturers learn all about it and can use it freely.

It is a remarkable fact that cotton and some other textile factories form an exception to the general rule that the capital required per head of the workers is generally greater in a large factory than in a small one. The reason is that in most other businesses the large factory has many things done by expensive machines which are done by hand in a small factory; so that while the wages bill is less in proportion to the output in a large factory than in a small one, the value of the machinery and the factory space occupied by the machinery is much greater. But in the simpler branches of the textile trades, small works have the same machinery as large works have; and since small steam-engines, etc. are proportionately more expensive than large ones, they require a greater fixed capital in proportion to their output than larger factories do; and they are likely to require a floating capital also rather greater in proportion.

See below IV. XII. 3.

Thus Boulton writing in 1770 when he had 700 or 800 persons employed as metallic artists and workers in tortoiseshell, stones, glass, and enamel, says:—"I have trained up many, and am training up more, plain country lads into good workmen; and wherever I find indications of skill and ability, I encourage them. I have likewise established correspondence with almost every mercantile town in Europe, and am thus regularly supplied with orders for the grosser articles in common demand, by which I am enabled to employ such a number of hands as to provide me with an ample choice of artists for the finer branches of work: and I am thus encouraged to erect and employ a more extensive apparatus than it would be prudent to employ for the production of the finer articles only." Smiles' Life of Boulton, p. 128.

Means to this end and their practical limitations are discussed in the latter half of the following chapter.

A ship's carrying power varies as the cube of her dimensions, while the resistance offered by the water increases only a little faster than the square of her dimensions; so that a large ship requires less coal in proportion to its tonnage than a small one. It also requires less labour, especially that of navigation: while to passengers it offers greater safety and comfort, more choice of company and better professional attendance. In short, the small ship has no chance of competing with the large ship between ports which large ships can easily enter, and between which the traffic is sufficient to enable them to fill up quickly.

It is characteristic of the great economic change of the last hundred years that when the first railway bills were passed, provision was made for allowing private individuals to run their own conveyances on them, just as they do on a highway or a canal; and now we find it difficult to imagine how people could have expected, as they certainly did, that this plan would prove a practicable one

Compare Appendix A, 13.

German economists call this "factory like" (fabrikmässig) house industry, as distinguished from the "national" house industry, which uses the intervals of other work (especially the winter interruptions of agriculture) for subsidiary work in making textile and other goods. (See Schönberg on Gewerbe in his Handbuch.) Domestic workers of this last class were common all over Europe in the Middle Ages but are now becoming rare except in the mountains and in eastern Europe. They are not always well advised in their choice of work; and much of what they make could be made better with far less labour in factories, so that it cannot be sold profitably in the open market: but for the most part they make for their own or their neighbours' use, and thus save the profits of a series of middlemen. Compare Survival of domestic industries by Gonner in the Economic Journal, Vol. II.

We have already noticed how almost the only perfect apprenticeships of modern times are those of the sons of manufacturers, who practice almost every important operation that is carried on in the works sufficiently to be able in after years to enter into the difficulties of all their employees and form a fair judgment on their work.

Until lately there has ever been in England a kind of antagonism between academic studies and business. This is now being diminished by the broadening of the spirit of our great universities, and by the growth of colleges in our chief business centres. The sons of business men when sent to the universities do not learn to despise their fathers' trades as often as they used to do even a generation ago. Many of them indeed are drawn away from business by the desire to extend the boundaries of knowledge. But the higher forms of mental activity, those which are constructive and not merely critical, tend to promote a just appreciation of the nobility of business work rightly done.

Much of the happiest romance of life, much that is most pleasant to dwell upon in the social history of England from the Middle Ages up to our own day is connected with the story of private partnerships of this class. Many a youth has been stimulated to a brave career by the influence of ballads and tales which narrate the difficulties and the ultimate triumph of the faithful apprentice, who has at length been taken into partnership, perhaps on marrying his employer's daughter. There are no influences on national character more far-reaching than those which thus give shape to the aims of aspiring youth.

Bagehot delighted to argue (see for instance English Constitution, ch. VII.) that a Cabinet Minister often derives some advantage from his want of technical knowledge of the business of his Department. For he can get information on matters of detail from the Permanent Secretary and other officials who are under his authority; and, while he is not likely to set his judgment against theirs on matters where their knowledge gives them the advantage, his unprejudiced common sense may well overrule the traditions of officialism in broad questions of public policy: and in like manner the interests of a company may possibly sometimes be most advanced by those Directors who have the least technical knowledge of the details of its business.

Compare Schloss, Methods of Industrial Remuneration; and Gilman, A dividend to labour.

The Germans say that success in business requires "Geld, Geduld, Genie und Glück." The chances that a working man has of rising vary somewhat with the nature of the work, being greatest in those trades in which a careful attention to details counts for most, and a wide knowledge, whether of science or of the world movements of speculation, counts for least. Thus for instance "thrift and the knowledge of practical details" are the most important elements of success in the ordinary work of the pottery trade; and in consequence most of those who have done well in it "have risen from the bench like Josiah Wedgwood" (see G. Wedgwood's evidence before the Commission on Technical Education); and a similar statement might be made about many of the Sheffield trades. But some of the working classes develop a great faculty for taking speculative risks; and if the knowledge of facts by which successful speculation must be guided, comes within their reach, they will often push their way through competitors who have started above them. Some of the most successful wholesale dealers in perishable commodities such as fish and fruit have begun life as market porters.

The danger of not being able to renew his borrowings just at the time when he wants them most, puts him at a disadvantage relatively to those who use only their own capital, much greater than is represented by the mere interest on his borrowings: and, when we come to that part of the doctrine of distribution which deals with earnings of management, we shall find that, for this among other reasons, profits are something more than interest in addition to net earnings of management, i.e. those earnings which are properly to be ascribed to the abilities of business men.

In an article on "The variation of productive forces" in the Quarterly Journal of Economics 1902, Professor Bullock suggests that the term "Economy of Organization" should be substituted for Increasing Return. He shows clearly that the forces which make for Increasing Return are not of the same order as those that make for Diminishing Return: and there are undoubtedly cases in which it is better to emphasize this difference by describing causes rather than results, and contrasting Economy of Organization with the Inelasticity of Nature's response to intensive cultivation.

There is no general rule that industries which yield increasing returns show also rising profits. No doubt a vigorous firm, which increases its scale of operations and obtains important (internal) economies which are peculiar to it, will show an increasing return and a rising rate of profit; because its increasing output will not materially affect the price of its produce. But profits tend to be low, as we shall see below (VI. VIII. 1, 2), in such industries as plain weaving, because their vast scale has enabled organization in production and marketing to be carried so far as to be almost dominated by routine.

The Englishman Mill bursts into unwonted enthusiasm when speaking (Political Economy, Book IV. ch. VI. ŧ 2) of the pleasures of wandering alone in beautiful scenery: and many American writers give fervid descriptions of the growing richness of human life as the backwoodsman finds neighbours settling around him, as the backwoods settlement developes into a village, the village into a town, and the town into a vast city. (See for instance Carey's Principles of Social Science and Henry George's Progress and Poverty.)

Recherches sur les Principes Mathématiques de la Théorie des Richesses, ch. IV. See also above III. IV. 7.

Theory of Political Economy, ch. IV.

Thus it is common to see the prices of bulky goods quoted as delivered "free on board" (f. o. b.) any vessel in a certain port, each purchaser having to make his own reckoning for bringing the goods home.

Thus the managers of a public or private "elevator," receive grain from a farmer, divide it into different grades, and return to him certificates for as many bushels of each grade as he has delivered. His grain is then mixed with those of other farmers; his certificates are likely to change hands several times before they reach a purchaser who demands that the grain shall be actually delivered to him; and little or none of what that purchaser receives may have come from the farm of the original recipient of the certificate.

In the case of shares of very small and little known companies, the difference between the price at which a dealer is willing to buy and that at which he will sell may amount to from five per cent. or more of the selling value. If he buys, he may have to carry this security a long time before he meets with any one who comes to take it from him, and meanwhile it may fall in value: while if he undertakes to deliver a security which he has not himself got and which does not come on the market every day, he may be unable to complete his contract without much trouble and expense.

A man may not trouble himself much about small retail purchases: he may give half-a-crown for a packet of paper in one shop which he could have got for two shillings in another. But it is otherwise with wholesale prices. A manufacturer cannot sell a ream of paper for six shillings while his neighbour is selling it at five. For those whose business it is to deal in paper know almost exactly the lowest price at which it can be bought, and will not pay more than this. The manufacturer has to sell at about the market price, that is at about the price at which other manufacturers are selling at the same time.

See IV. I. 2, and Note XII. in the Mathematical Appendix.

A simple form of the influence which opinion exerts on the action of dealers, and therefore on market price, is indicated in this illustration: we shall be much occupied with more complex developments of it later on.

For instance a buyer is sometimes straitened for want of ready money, and has to let offers pass by him in no way inferior to others which he has gladly accepted: his own funds being exhausted, he could not perhaps borrow except on terms that would take away all the profit that the bargains had at first sight offered. But if the bargain is really a good one, some one else, who is not so straitened, is nearly sure to get hold of it.

Conversely, if the market had opened much to the disadvantage of the sellers and they had sold some corn very cheap, so that they remained in great want of ready money, the final utility of money to them might have remained so high that they would have gone on selling considerably below 36s. until the buyers had been supplied with all that they cared to take. The market would then close without the true equilibrium price having ever been reached, but a very near approach would have been made to it.

Book V, Chapter III

IV. I. 2.

Mill and some other economists have followed the practice of ordinary life in using the term Cost of production in two senses, sometimes to signify the difficulty of producing a thing, and sometimes to express the outlay of money that has to be incurred in order to induce people to overcome this difficulty and produce it. But by passing from one use of the term to the other without giving explicit warning, they have led to many misunderstandings and much barren controversy. The attack on Mill's doctrine of Cost of Production in relation to Value, which is made in Cairnes' Leading Principles, was published just after Mill's death; and unfortunately his interpretation of Mill's words was generally accepted as authoritative, because he was regarded as a follower of Mill. But in an article by the present writer on "Mill's Theory of Value" (Fortnightly Review, April 1876) it is argued that Cairnes had mistaken Mill's meaning, and had really seen not more but less of the truth than Mill had done.

We have already (II. III.) noticed that the economic use of the term "production" includes the production of new utilities by moving a thing from a place in which it is less wanted to a place in which it is more wanted, or by helping consumers to satisfy their needs.

See III. V. and IV. VII. 8.

See IV. XIII. 2.

See last paragraph of IV. XII.

See III. III. 4.

Measuring, as in the case of the demand curve, amounts of the commodity along Ox and prices parallel to Oy, we get for each point M along Ox a line MP drawn at right angles to it measuring the supply price for the amount OM, the extremity of which, P, may be called a supply point; this price MP being made up of the supply prices of the several factors of production for the amount OM. The locus of P may be called the supply curve.

It must be remembered that these supply prices are the prices not of units of the several factors but of those amounts of the several factors which are required for producing a yard of the cloth. Thus, for instance, p3p4 is the supply price not of any fixed amount of labour but of that amount of labour which is employed in making a yard where there is an aggregate production of OM yards. (See above, § 3.) We need not trouble ourselves to consider just here whether the ground-rent of the factory must be put into a class by itself: this belongs to a group of questions which will be discussed later. We are taking no notice of rates and taxes, for which he would of course have to make his account.

That is, a point moving along the supply curve towards the right may either rise or fall, or even it may alternately rise and fall; in other words, the supply curve may be inclined positively or negatively, or even at some parts of its course it may be inclined positively and at others negatively. (See footnote on p. 99.)

Compare V. I. 1. To represent the equilibrium of demand and supply geometrically we may draw the demand and supply curves together as in Fig. 19. If then OR represents the rate at which production is being actually carried on, and Rd the demand price is greater than Rs the supply price, the production is exceptionally profitable, and will be increased. R, the amount-index, as we may call it, will move to the right. On the other hand, if Rd is less than Rs, R will move to the left. If Rd is equal to Rs, that is, if R is vertically under a point of intersection of the curves, demand and supply are in equilibrium.

See below V. V. 2 and Appendix H. 4.

See above pp. 34-36.

For he might have applied these efforts, or efforts equivalent to them, to producing immediate gratifications; and if he deliberately chose the deferred gratifications, it would be because, even after allowing for the disadvantages of waiting, he regarded them as outweighing the earlier gratifications which he could have substituted for them. The motive force then tending to deter him from building the house would be his estimate of the aggregate of these efforts, the evil or discommodity of each being increased in geometrical proportion (a sort of compound interest) according to the corresponding interval of waiting. The motive on the other hand impelling him to build it, would be expectation of the satisfaction which he would have from the house when completed; and that again might be resolved into the aggregate of many satisfactions more or less remote, and more or less certain, which he expected to derive from its use. If he thought that this aggregate of discounted values of satisfactions that it would afford him, would be more than a recompense to him for all the efforts and waitings which he had undergone, he would decide to build. (See III. V. 3, IV. VII. 8 and Note XIII in the Mathematical Appendix.)

We may, if we choose, regard the price of the business undertaker's own work as part of the original outlay, and reckon compound interest on it together with the rest. Or we may substitute for compound interest a sort of "compound profit." The two courses are not strictly convertible: and at a later stage we shall find that in certain cases the first is to be preferred, and in others the second.

In the aggregate the income from the saving will in the ordinary course be larger in amount than the saving by the amount of the interest that is the reward of saving. But, as it will be turned to account in enjoyment later than the original saving could have been, it will be discounted for a longer period (or accumulated for a shorter); and if entered in the balance sheet of the investment in place of the original saving, it would stand for exactly the same sum. (Both the original income which was saved and the subsequent income earned by it are assessed to income tax; on grounds similar to those which make it expedient to levy a larger income tax from the industrious than from the lazy man.) The main argument of this section is expressed mathematically in Note XIII.

Almost every trade has its own difficulties and its own customs connected with the task of valuing the capital that has been invested in a business, and of allowing for the depreciation which that capital has undergone from wear-and-tear, from the influence of the elements, from new inventions, and from changes in the course of trade. These two last causes may temporarily raise the value of some kinds of fixed capital, at the same time that they are lowering that of others. And people whose minds are cast in different moulds, or whose interests in the matter point in different directions, will often differ widely on the question what part of the expenditure required for adapting buildings and plant to changing conditions of trade, may be regarded as an investment of new capital; and what ought to be set down as charges incurred to balance depreciation, and treated as expenditure deducted from the current receipts, before determining the net profits or true income earned by the business. These difficulties, and the consequent differences of opinion, are greatest of all with regard to the investment of capital in building up a business connection, and the proper method of appraising the goodwill of a business, or its value "as a going concern." On the whole of this subject see Matheson's Depreciation of Factories and their Valuation.

See pp. 84-91, and 64-67.

The substance of part of this section was placed in VI. I. 7 in earlier editions. But it seems to be needed here in preparation for the central chapters of Book V.

See III. V. 1.

The remainder of this section goes very much on the lines of the earlier half of Note XIV. in the Mathematical Appendix; which may be read in connection with it. The subject is one in which the language of the differential calculus—not its reasonings—are specially helpful to clear thought: but the main outlines can be presented in ordinary language.

See above III. III. 1; and the footnote on pp. 156-7.

Especially in V. IX. "There are many systems of Prime Cost in vogue ... we take Prime Cost to mean, as in fact the words imply, only the original or direct cost of production; and while in some trades it may be a matter of convenience to include in the cost of production a proportion of indirect expenses, and a charge for depreciation on plant and buildings, in no case should it comprise interest on capital or profit." (Garcke and Fells, Factory Accounts, ch. I.)

The Supplementary costs, which the owner of a factory expects to be able to add to the prime costs of its products, are the source of the quasi-rents which it will yield to him. If they come up to his expectation, then his business so far yields good profits: if they fall much short of it, his business tends to go to the bad. But his statement bears only on long-period problems of value: and in that connection the difference between Prime and Supplementary costs has no special significance. The importance of the distinction between them is confined to short-period problems.

V. III. 5.

There are indeed not many occasions on which the calculations of a business man for practical purposes need to look forward so far, and to extend the range of the term Normal over a whole generation: but in the broader applications of economic science it is sometimes necessary to extend the range even further, and to take account of the slow changes that in the course of centuries affect the supply price of the labour of each industrial grade.

Compare I. II. 7.

As has been explained in the Preface, pp. vi-ix, this volume is concerned mainly with normal conditions; and these are sometimes described as Statical. But in the opinion of the present writer the problem of normal value belongs to economic Dynamics: partly because Statics is really but a branch of Dynamics, and partly because all suggestions as to economic rest, of which the hypothesis of a Stationary state is the chief, are merely provisional, used only to illustrate particular steps in the argument, and to be thrown aside when that is done.

See below, V. XI. 6; and compare Keynes, Scope and Method of Political Economy, VI. 2.

Compare the Preface and Appendix H, 4.

See V. XI. 1.

Tooke (History of Prices, Vol. I. p. 104) tells us: "There are particular articles of which the demand for naval and military purposes forms so large a proportion to the total supply, that no diminution of consumption by individuals can keep pace with the immediate increase of demand by government; and consequently, the breaking out of a war tends to raise the price of such articles to a great relative height. But even of such articles, if the consumption were not on a progressive scale of increase so rapid that the supply, with all the encouragement of a relatively high price, could not keep pace with the demand, the tendency is (supposing no impediment, natural or artificial, to production or importation) to occasion such an increase of quantity, as to reduce the price to nearly the same level as that from which it had advanced. And accordingly it will be observed, by reference to the table of prices, that salt-petre, hemp, iron, etc., after advancing very considerably under the influence of a greatly extended demand for military and naval purposes, tended downwards again whenever that demand was not progressively and rapidly increasing." Thus a continuously progressive increase in demand may raise the supply price of a thing even for several years together; though a steady increase of demand for that thing, at a rate not too great for supply to keep pace with it, would lower price.

V. III. 6. The distinction will be yet further discussed in V. XII. and Appendix H. See also Keynes, Scope and Method of Political Economy, ch. VII.

Pp. 360-7.

Where there is a strong combination, tacit or overt, producers may sometimes regulate the price for a considerable time together with very little reference to cost of production. And if the leaders in that combination were those who had the best facilities for production, it might be said, in apparent though not in real contradiction to Ricardo's doctrines, that the price was governed by that part of the supply which was most easily produced. But as a fact, those producers whose finances are weakest, and who are bound to go on producing to escape failure, often impose their policy on the rest of the combination: insomuch that it is a common saying, both in America and England, that the weakest members of a combination are frequently its rulers.

This general description may suffice for most purposes: but in chapter XI. there will be found a more detailed study of that extremely complex notion, a marginal increment in the processes of production by a representative firm; together with a fuller explanation of the necessity of referring our reasonings to the circumstances of a representative firm, especially when we are considering industries which show a tendency to increasing return.

Compare the first section of this chapter. Of course the periods required to adapt the several factors of production to the demand may be very different; the number of skilled compositors, for instance, cannot be increased nearly as fast as the supply of type and printing-presses. And this cause alone would prevent any rigid division being made between long and short periods. But in fact a theoretically perfect long period must give time enough to enable not only the factors of production of the commodity to be adjusted to the demand, but also the factors of production of those factors of production to be adjusted and so on; and this, when carried to its logical consequences, will be found to involve the supposition of a stationary state of industry, in which the requirements of a future age can be anticipated an indefinite time beforehand. Some such assumption is indeed unconsciously implied in many popular renderings of Ricardo's theory of value, if not in his own versions of it; and it is to this cause more than any other that we must attribute that simplicity and sharpness of outline, from which the economic doctrines in fashion in the first half of this century derived some of their seductive charm, as well as most of whatever tendency they may have to lead to false practical conclusions.

But an answer may be given here to the objection that since "the economic world is subject to continual changes, and is becoming more complex, ... the longer the run the more hopeless the rectification": so that to speak of that position which value tends to reach in the long run is to treat "variables as constants." (Devas, Political Economy, Book IV. ch. V.) It is true that we do treat variables provisionally as constants. But it is also true that this is the only method by which science has ever made any great progress in dealing with complex and changeful matter, whether in the physical or moral world. See above V. V. 2.

Book V, Chapter VI

Compare III. III. 6. It will be recollected that the things in a form ready for immediate use have been called goods of the first order, or consumers' goods; and that things used as factors of production of other goods have been called producers' goods, or goods of the second and higher orders or intermediate goods: also that it is difficult to say when goods are really finished; that many things are commonly treated as finished consumers' goods before they are really ready for consumption, e.g. flour. See II. III. 1. The vagueness of the notion of instrumental goods, regarded as things the value of which is derived from that of their products, is indicated in II. IV. 13.

This is at any rate true under all ordinary conditions: there will be less extra charges for overtime; and the price of the labour of carpenters, bricklayers and others is likely rather to go down than to go up, and the same is true of bricks and other building materials.

The broad account given in the text may suffice for most purposes; and the general reader should perhaps omit the remaining footnotes to this chapter.

In illustrating this by a diagram, it will be well, for the sake of shortness of wording, to divide the expenses of production of a commodity into the supply prices of two things of which it is made; let us then regard the supply price of a knife as the sum of the supply prices of its blade and handle, and neglect the expense of putting the two together. Let ss' be the supply curve for handles and SS' that for knives; so that M being any point on Ox, and MqQ being drawn vertically to cut ss' in q and SS' in Q, Mq is the supply price for OM handles, qQ is the supply price for OM blades and MQ the supply price for OM knives. Let DD' the demand curve for knives cut SS' in A, and AaB be drawn vertically as in the figure. Then in equilibrium OB knives are sold at a price BA of which Ba goes for the handle and aA for the blade.

(In this illustration we may suppose that sufficient time is allowed to enable the forces which govern supply price to work themselves out fully; and we are at liberty therefore to make our supply curves inclined negatively. This change will not affect the argument; but on the whole it is best to take our typical instance with the supply curve inclined positively.)

Now let us suppose that we want to isolate for separate study the demand for knife handles. Accordingly we suppose that the demand for knives and the supply of blades conform to the laws indicated by their respective curves: also that the supply curve for handles still remains in force and represents the circumstances of normal supply of handles, although the supply of handles is temporarily disturbed. Let MQ cut DD' in P, then MP is the demand price for OM knives and Qq is the supply price for OM blades. Take a point p in MP such that Pp is equal to Qq, and therefore Mp is the excess of MP over Qq; then Mp is the demand price for OM handles. Let dd' be the locus of p obtained by giving M successive positions along Ox and finding the corresponding positions of p; then dd' is the derived demand curve for handles. Of course it passes through a. We may now neglect all the rest of the figure except the curves dd', ss'; and regard them as representing the relations of demand for and supply of handles, other things being equal, that is to say, in the absence of any disturbing cause which affects the law of supply of blades and the law of demand for knives. Ba is then the equilibrium price of handles, about which the market price oscillates, in the manner investigated in the preceding chapter, under the influence of demand and supply, of which the schedules are represented by dd' and ss'. It has already been remarked that the ordinary demand and supply curves have no practical value except in the immediate neighbourhood of the point of equilibrium. And the same remark applies with even greater force to the equation of derived demand.

[Since Mp - Mq = MP - MQ; therefore A being a point of stable equilibrium, the equilibrium at a also is stable. But this statement needs to be somewhat qualified if the supply curves are negatively inclined: see Appendix H.]

In the illustration that has just been worked out the unit of each of the factors remains unchanged whatever be the amount of the commodity produced; for one blade and one handle are always required for each knife; but when a change in the amount of the commodity produced occasions a change in the amount of each factor that is required for the production of a unit of the commodity, the demand and supply curves for the factor got by the above process are not expressed in terms of fixed units of the factor. They must be translated back into fixed units before they are available for general use. (See Mathematical Note XIV bis.)

We have to inquire under what conditions the ratio pM to aB will be the greatest, pM being the demand price for the factor in question corresponding to a supply reduced from OB to OM, that is reduced by the given amount BM. The second condition is that PM should be large; and since the elasticity of demand is measured by the ratio which BM bears to the excess of PM over AB, the greater PM is, the smaller other things being equal, is the elasticity of demand.

The third condition is that when PM exceeds AB in a given ratio, pM shall be caused to exceed Ba in a large ratio: and other things being equal, that requires Ba to be but a small part of BA.

That is, if Qq had been smaller than it is, Pp would have been smaller and Mp would have been larger. See also Mathematical Note XV.

It is shown in Böhm-Bawerk's excellent Grundzüge der Theorie des wirtschaftlichen Güterwerts (Jahrbuch für Nationalökonomie und Statistik, vol. XIII. p. 59) that if all but one of the factors of production of a commodity have available substitutes in unlimited supply, by which their own price is rigidly fixed, the derived demand price for the remaining factor will be the excess of the demand price for the finished product over the sum of the supply prices thus fixed for the remaining factors. This is an interesting special case of the law given in the text.

See Mathematical Note XVI.

See above, III. IV. 2, 4.

See III. V.

Thus, let a factor of production have three uses. Let d1d1' be the demand curve for it in its first use. From N any point on Oy draw Np1 horizontally to cut d1d1' in p1; then Np1 is the amount that is demanded for the first use at price ON. Produce Np1 to p2, and further on to P making p1p2 and p2P of such lengths as to represent the amounts of the factor demanded at price ON for the second and third uses respectively. As N moves along Oy let p2 trace out the curve d2d2' and let P trace out the curve DD'. Thus d2d2' would be the demand curve for the factor if it had only its first and second uses. DD' is its demand curve for all three uses. It is immaterial in what order we take the several uses. In the case represented, the demand for the second use begins at a lower price and that for the third use begins at a higher price than does the demand for the first use. (See Mathematical Note XVII.)

Professor Dewsnup (American Economic Review, Supplement 1914, p. 89) suggests that things should be described as joint products, when their "total costs of production by a single plant are less than the sum of the costs of their production by separate plants." This definition is less general than that reached at the end of this section; but it is convenient for some special uses.

If it is desired to isolate the relations of demand and supply for a joint product, the derived supply price is found in just the same way as the derived demand price for a factor of production was found in the parallel case of demand. Other things must be assumed to be equal (that is, the supply schedule for the whole process of production must be assumed to remain in force and so must the demand schedule for each of the joint products except that to be isolated). The derived supply price is then found by the rule that it must equal the excess of the supply price for the whole process of production over the sum of the demand prices of all the other joint products; the prices being taken throughout with reference to corresponding amounts.

We may again illustrate by a simple example in which it is assumed that the relative amounts of the two joint products are unalterable. Let SS' be the supply curve for bullocks which yield meat and leather in fixed quantities; dd' the demand curve for their carcases, that is, for the meat derived from them. M being any point on Ox draw Mp vertically to cut dd' in p, and produce it to P so that pP represents the demand price for OM hides. Then MP is the demand price for OM bullocks, and DD' the locus of P is the demand curve for bullocks: it may be called the total demand curve. Let DD' cut SS' in A; and draw AaB as in the figure. Then in equilibrium OB bullocks are produced and sold at the price BA of which Ba goes for the carcase and aA for the hide.

See Mathematical Note XIX.

A little more is said on this subject in the next chapter: it is discussed fully in the forthcoming work on Industry and Trade.

The latter phrase "competing commodities" is used by Prof. Fisher in his brilliant Mathematical Investigations in the theory of value and prices, which throw much light on the subjects discussed in the present chapter.

Comp. Jevons, l. c. pp. 145 6. See also above, footnotes on pp. 100, 105.

The want which all the rivals tend to satisfy is met by a composite supply, the total supply at any price being the sum of the partial supplies at that price.

Thus, for instance, N being any point on Oy draw Nq1q2Q parallel to Ox such that Nq1, q1q2 and q2Q are respectively the amounts of the first, second and third of those rivals which can be supplied at the price ON. Then NQ is the total composite supply at that price, and the locus of Q is the total supply curve of the means of satisfying the want in question. Of course the units of the several things which are rivals must be so taken that each of them satisfies the same amount of the want. In the case represented in the figure small quantities of the first rival can be put on the market at a price too low to call forth any supply of the other two, and small quantities of the second at a price too low to call forth any of the third. (See Mathematical Note XX.)

Toynbee (Industrial Revolution, p. 80).

Again, since sheep and oxen compete for the use of land, leather and cloth compete in indirect demand for the use of a factor of production. But also in the upholsterer's shop they compete as supplying means for meeting the same want. There is thus a composite demand on the part of upholsterer and shoemaker for leather; and also for cloth when the upper part of a shoe is made of cloth: the shoe offers a joint demand for cloth and leather, they offering complementary supplies: and so on, in endless complications. See Mathematical Note XXI. The Austrian doctrine of "imputed value" has something in common with that of derived value given in this chapter. Whichever phrase be used, it is important that we should recognize the continuity between the old doctrine of value and the new; and that we should treat imputed or derived values merely as elements which take their place with many others in the broad problem of distribution and exchange. The new phrases merely give the means of applying to the ordinary affairs of life, some of that precision of expression which is the special property of mathematical language. Producers have always to consider how the demand for any raw material in which they are interested is dependent on the demand for the things in making which it is used, and how it is influenced by every change that affects them; and this is really a special case of the problem of ascertaining the efficient strength of any one of the forces, which contribute to a common result. In mathematical language this common result is called a function of the various forces: and the (marginal) contribution, which any of them is making to it, is represented by the (small) change in the result which would result from a (small) change in that force; that is by the differential coefficient of the result with regard to that force. In other words, the imputed value, or the derived value of a factor of production, if used for only one product, is the differential coefficient of that product with regard to that factor; and so on in successive complications, as indicated in Notes XIV.—XXI. of the Mathematical Appendix. (Some objections to parts of Prof. Wieser's doctrine of imputed values are well urged by Prof. Edgeworth, Economic Journal, Vol. V. pp. 279-85.)

There is scope for applications of mathematical or semi-mathematical analyses, such as are indicated in the last chapter, to some of the chief practical difficulties of book-keeping by double entry in different trades.

Compare ch. VI. § 4.

Of course this does not apply to railway rates. For a railway company having little elasticity as to its methods of working, and often not much competition from outside, has no inducement to endeavour to adjust the charges which it makes for different kinds of traffic to their cost to itself. In fact though it may ascertain the prime cost in each case easily enough, it cannot determine accurately what are the relative total costs of fast and slow traffic, of short and long distance traffic, of light and heavy traffic; nor again of extra traffic when its lines and its trains are crowded and when they are nearly empty.

Again, certain insurance companies in America take risks against fire in factories at very much less than the ordinary rates, on condition that some prescribed precautions are taken, such as providing automatic sprinklers and making the walls and floor solid. The expense incurred in these arrangements is really an insurance premium; and care must be taken not to count it twice over. A factory which undertakes its own risks against fire will have to add to the prime cost of its goods an allowance for insurance at a lower rate, if it is arranged on this plan, than if built in the ordinary way.

Again, when a farmer has calculated the expenses of raising any particular crop with reference to an average year, he must not count in addition insurance against the risk that the season may be bad, and the crop a failure: for in taking an average year, he has already set off the chances of exceptionally good and bad seasons against one another. When the earnings of a ferryman have been calculated on the average of a year, allowance has already been made for the risk that he may sometimes have to cross the stream with an empty boat.

Wealth of Nations, Book I. ch. X.

The evils resulting from the uncertainty involved in great business risks are well shown by von Thünen (Isolirter Staat, II. I. p. 82).

Numerous objections have been urged against the important place assigned to marginal costs in modern analysis. But it will be found that most of them rely on arguments, in which statements referring to normal conditions and normal value are controverted by statements relating to abnormal or particular conditions.

The reader is referred to the footnote on p. 393 with special reference to the compressed mathematical version of the central problem of value which begins in Note XIV. in the Mathematical Appendix and culminates in Note XXI.

Compare V. III. 3; and V. IV. 3, 4; and Note XIV. in the Mathematical Appendix.

This margin will vary with local circumstances, as well as with the habits, inclinations, and resources of individual farmers. The difficulty of applying steam machinery in small fields and on rugged ground is overcome more generally in those districts in which labour is scarce than in those in which it is plentiful; especially if, as is probable, coal is cheaper, and the feed of horses dearer in the former than the latter.

Skilled manual labour being generally used for special orders and for things of which not many are required of the same pattern; and unskilled labour sided by specialized machinery being used for others. The two methods are to be seen side by side on similar work in every large workshop: but the position of the line between them will vary a little from one workshop to another.

The changes, which he desires, may be such as could only be made on a large scale; as for instance the substitution of steam-power for hand-power in a certain factory; and in that case there would be a certain element of uncertainty and risk in the change. Such breaches of continuity are however inevitable both in production and consumption if we regard the action of single individuals. But as there is a continuous demand in a large market for hats and watches and wedding cakes, though no individual buys many of them (see III. III 5), so there will always be trades in which small businesses are most economically conducted without steam-power, and larger businesses with; while businesses of intermediate size are on the margin. Again, even in large establishments in which steam is already in use, there will always be some things done by hand-power which are done by steam-power elsewhere; and so on.

See p. 387, and Mathematical Note XVI. See also other illustrations in V. VI., VII. A further illustration of the relation between the wages of the marginal shepherd, and the net product of his labour will be worked out in detail in VI. I. 7.

See V. IV. 4; see also the note on von Thünen, below, p. 523.

See above IV. III. 8; and Carver, Distribution of Wealth, ch. II., and above footnotes on pp. 319, 320. Mr J. A. Hobson is a vigorous and suggestive writer on the realistic and social sides of economics: but, as a critic of Ricardian doctrines, he is perhaps apt to underrate the difficulty of the problems which he discusses. He argues that if the marginal application of any agent of production be curtailed, that will so disorganize production that every other agent will be working to less effect than before; and that therefore the total resulting loss will include not only the true marginal product of that agent, but also a part of the products due to the other agents: but he appears to have overlooked the following points:—(1) There are forces constantly at work tending so to readjust the distribution of resources between their different uses, that any maladjustment will be arrested before it has gone far: and the argument does not profess to apply to exceptional cases of violent maladjustment (2) When the adjustment is such as to give the best results, a slight change in the proportions in which they are applied diminishes the efficiency of that adjustment by a quantity which is very small relatively to that change—in technical language it is of "the second order of smalls"—; and it may therefore be neglected relatively to that change. (In pure mathematical phrase, efficiency being regarded as a function of the proportions of the agents; when the efficiency is at its maximum, its differential coefficient with regard to any one of these proportions is zero.) A grave error would therefore have been involved, if any allowance had been made for those elements which Mr Hobson asserts to have been overlooked. (3) In economics, as in physics, changes are generally continuous. Convulsive changes may indeed occur, but they must be dealt with separately: and an illustration drawn from a convulsive change can throw no true light on the processes of normal steady evolution. In the particular problem before us, this precaution is of special importance: for a violent check to the supply of any one agent of production, may easily render the work of all other agents practically useless; and therefore it may inflict a loss out of all proportion to the harm done by a small check to the supply of that agent when applied up to that margin, at which there was doubt whether the extra net product due to a small additional application of it would be remunerative. The study of changes in complex quantitative relations is often vitiated by a neglect of this consideration, to which Mr Hobson seems to be prone; as indeed is instanced by his remarks on a "marginal shepherd" in The Industrial System, p. 110. See Professor Edgeworth's masterly analyses of the two instances mentioned in this note, Quarterly Journal of Economics, 1904, p. 167; and Scientia, 1910. pp. 95-100.

This statement is reproduced from the Preface to the first edition of the present volume.

The substance of this section is reproduced from answers to questions proposed by the Royal Commission on Local Taxation. See [C. 9528], 1899, pp. 112-126.

Such circular reasonings are sometimes nearly harmless: but they always tend to overlay and hide the real issues. And they are sometimes applied to illegitimate uses by company promoters; and by advocates of special interests, who desire to influence the course of legislation in their own favour. For instance a semi-monopolistic business aggregation or trust is often "over-capitalized." To effect this a time is chosen, at which the branch of production with which it is concerned is abnormally prosperous: when perhaps some solid firms are earning fifty per cent. net on their capital in a single year, and thus making up for lean years past and to come in which their receipts will do little more than cover prime costs. Financiers connected with the flotation sometimes even arrange that the businesses to be offered to the public shall have a good many orders to fill at specially favourable prices: the loss falling on themselves, or on other companies which they control. The gains to be secured by semi-monopolistic selling, and possibly by some further economies in production are emphasized: and the stock of the trust is absorbed by the public. If ultimately objection to the conduct of the trust is raised, and especially to the strengthening of its semi-monopolistic position by a high tariff or any other public favour, the answer is given that the shareholders are receiving but a moderate return on their investments. Such cases are not uncommon in America. In this country a more moderate watering of the stock of some railways has been occasionally used indirectly as a defence of the shareholders against a lowering of rates, that threatens to reduce dividends on inflated capital below what would be a fair return on solid capital.

See above, p. 412.

Professor Fetter seems to ignore this lesson in an article on "The passing of the concept of rent" in the Quarterly Journal of Economics, May 1901, p. 419; where he argues that "if only those things which owe nothing to labour are classed as land, and if it is then shown that there is no material thing in settled countries of which this can be said, it follows that everything must be classed as capital." Again he appears to have missed the true import of the doctrines which he assails, when he argues (ib. pp. 423-9) against "Extension as the fundamental attribute of land, and the basis of rent." The fact is that its extension (or rather the aggregate of "its space relations") is the chief, though not the only property of land, which causes the income derived from it (in an old country) to contain a large element of true rent: and that the element of true rent, which exists in the income derived from land, or the "rent of land" in the popular use of the term, is in practice so much more important than any others that it has given a special character to the historical development of the Theory of Rent (see above, p. 147). If meteoric stones of absolute hardness, in high demand and incapable of increase, had played a more important part in the economic history of the world than land, then the elements of true rent which attracted the chief attention of students, would have been associated with the property of hardness; and this would have given a special tone and character to the development of the Theory of Rent. But neither extension nor hardness is a fundamental attribute of all things which yield a true rent. Professor Fetter seems also to have missed the point of the central doctrine as to rents, quasi-rents and interest, given above.

Compare Cassel, Das Recht auf den vollen Arbeitsertrag, p. 81.

Again a quasi-rent has been described as a sort of "conjuncture" or "opportunity" profit; and, almost in the same breath, as no profit or interest at all, but only a rent. For the time being, it is a conjuncture or opportunity income: while in the long run it is expected to, and it generally does, yield a normal rate of interest (or if earnings of management are counted in, of profit) on the free capital, represented by a definite sum of money that was invested in producing it. By definition the rate of interest is a percentage; that is a relation between two numbers (see above, p. 412). A machine is not a number: its value may be a certain number of pounds or dollars: but that value is estimated, unless the machine be a new one, as the aggregate of its (discounted) earnings, or quasi-rents. If the machine is new, its makers have calculated that this aggregate will appear to probable purchasers as the equivalent of a price which will repay the makers for it: in that case therefore it is as a rule, both a cost price, and a price which represents an aggregate of (discounted) future incomes. But when the machine is old and partially obsolete in pattern, there is no close relation between its value and its cost of production: its value is then simply the aggregate of the discounted values of the future quasi-rents, which it is expected to earn.

Book V, Chapter X

Of course the character and extent of the improvements depends partly on the conditions of land tenure, and the enterprise and ability and command over capital on the part of landlords and tenants which existed at the time and place in question. In this connection we shall find, when we come to study land tenure, that there are large allowances to be made for the special conditions of different places.

That part of the income which is required to cover wear-and-tear bears some resemblance to a royalty, which does no more than cover the injury done to a mine by taking ore out of it.

Compare V. IX. 5.

Compare III. v. 3 and V. IV. 2.

The relations between rent and profits engaged the attention of the economists of the last generation; among whom may be specially mentioned Senior and Mill, Hermann and Mangoldt. Senior seemed almost on the point of perceiving that the key of the difficulty was held by the element of time: but here as elsewhere he contented himself with suggestions; he did not work them out. He says (Political Economy, p. 129), "for all useful purposes the distinction of profits from rent ceases as soon as the capital from which a given revenue arises has become, whether by gift or by inheritance, the property of a person to whose abstinence and exertions it did not owe its creation." Again, Mill says, Political Economy, Book III. ch. V. § 4, "Any difference in favour of certain producers or in favour of production in certain circumstances is the source of a gain, which though not called rent unless paid periodically by one person to another, is governed by laws entirely the same with it."

Of course the adjustments of rent to the true economic surplus from the land are in practice slow and irregular. These matters are discussed in VI. IX. and X., and the incidence of a tax on grain under certain rather arbitrary assumptions is studied in some detail in Appendix K.

The exemption of vacant building land from taxes on its full value retards building. See Appendix G.

In so far as the farmer is producing raw material, or even human food, for market, his distribution of resources between different uses is a problem of business economy: in so far as he is producing for his own domestic consumption, it is, in part at least, a problem of domestic economy. Compare above V. IV. 4. It may be added that Note XIV. in the Mathematical Appendix emphasizes the fact that that distribution of outlay between different enterprises, which will give a maximum aggregate return, is fixed by the same set of equations as that for the similar problem in domestic economy.

If for instance he reckoned that he could get a surplus of £30 above his expenses (other than rent) in spite of the tax by growing hops, and a surplus of only £20 above similar expenses by growing any other crop, it could not be truly said that the rent which the field could be made to yield by growing other crops, "entered into" the marginal price of oats. But it is easier to interpret the classical doctrine that "Rent does not enter into cost of production" in a sense in which it is not true, and to scoff at it, than in the sense in which it was intended and is true. It seems best therefore to avoid the phrase.

Jevons asks (Preface to Theory of Political Economy, p. liv): "If land which has been yielding £2 per acre rent, as pasture, be ploughed up and used for raising wheat, must not the £2 per acre be debited against the expenses of production of wheat?" The answer is in the negative. For there is no connection between this particular sum of £2 and the expenses of production of that wheat which only just pays its way. What should be said is:—"When land capable of being used for producing one commodity is used for producing another, the price of the first is raised by the consequent limitation of its field of production. The price of the second will be the expenses of production (wages and profits) of that part of it which only just pays its way, that which is produced on the margin of profitable expenditure. And if for the purposes of any particular argument we take together the whole expenses of the production on that land, and divide these among the whole of the commodity produced; then the rent which we ought to count in is not that which the land would pay if used for producing the first commodity, but that which it does pay when used for producing the second."

See above, p. 169. Adam Smith is attacked by Ricardo for putting rent on the same footing with wages and profits as parts of (money) cost of production; and no doubt he does this sometimes. But yet he says elsewhere, "Rent it is to be observed enters into the composition of the price of commodities in a different way from wages and profit. High or low wages and profit are the causes of high or low price: high or low rent is the effect of it. It is because high or low wages and profit must be paid in order to bring a particular commodity to market that its price is high or low. But it is because its price is high or low a great deal more, or very little more, or no more than what is sufficient to pay those wages and profits, that it affords a high rent, or a low rent, or no rent at all." (Wealth of Nations, I. XI.) In this, as in many other instances, he anticipated in one part of his writings truths which in other parts he has seemed to deny.

The royalty is of course calculated in regard to those seams in the mine, which are neither exceptionally rich and easy of working, nor exceptionally poor and difficult. Some seams barely pay the expenses of working them; and some which run short, or have a bad fault, do not even nearly pay the wages of the labour spent on them. The whole argument however implicitly assumes the conditions of an old country. Professor Taussig is probably right when, having in view the circumstances of a new country (Principles, II. p. 96), he "doubts whether any payment at all can be secured by the owner of the very poorest mine, assuming he has done nothing to develop it."

Book V, Chapter XI

See IV. III. 6.

See IV. X.—XIII.

If we suppose that two farms, which sell in the same market, return severally to equal applications of capital and labour amounts of produce, the first of which exceeds the second by the extra cost of carrying its produce to market, then the rent of the two farms will be the same. (The capital and labour applied to the two farms are here supposed to be reduced to the same money measure, or which comes to the same thing, the two farms are supposed to have equally good access to markets in which to buy.) Again, if we suppose that two mineral springs A and B supplying exactly the same water are capable of being worked each to an unlimited extent at a constant money cost of production; this cost being, say twopence a bottle at A whatever the amount produced by it, and twopence half-penny at B; then those places to which the cost of carriage per bottle from B is a half-penny less than from A, will be the neutral zone for their competition. (If the cost of carriage be proportional to the distance, this neutral zone is a hyperbola of which A and B are foci.) A can undersell B for all places on A's side of it, and vice versâ; and each of them will be able to derive a monopoly rent from the sale of its produce within its own area. This is a type of a great many fanciful, but not uninstructive, problems which readily suggest themselves. Compare von Thünen's brilliant researches in Der isolirte Staat.

Cases of this kind are of course most frequent in new countries. But they are not very rare in old countries: Saltburn is a conspicuous instance; while a more recent instance of exceptional interest is furnished by Letchworth Garden City.

Governments have great facilities for carrying out schemes of this kind, especially in the matter of choosing new sites for garrison towns, arsenals, and establishments for the manufacture of the materials of war. In comparisons of the expenses of production by Government and by private firms, the sites of the Government works are often reckoned only at their agricultural value. But such a plan is misleading. A private firm has either to pay heavy annual charges on account of its site, or to run very heavy risks if it tries to make a town for itself. And therefore in order to prove that Government management is for general purposes as efficient and economical as private management, a full charge ought to be made in the balance-sheets of Government factories for the town-value of their sites. In those exceptional branches of production for which a Government can found a manufacturing town without incurring the risks that a private firm would incur in a similar case, that point of advantage may fairly be reckoned as an argument for Governments undertaking those particular businesses.

The value of agricultural land is commonly expressed as a certain number of times the current money rental, or in other words a certain "number of years' purchase" of that rental: and other things being equal it will be the higher, the more important these direct gratifications are, as well as the greater the chance that they and the money income afforded by the land will rise. The number of years' purchase would be increased also by an expected fall either in the future normal rate of interest or in the purchasing power of money.

A few site-values have fallen in districts which have been deserted by fashion or trade. But on the other hand annual site values have risen to be many times as great as the ground-rents in the case of land which was leased when it had no special situation value, but has since become a chief centre of fashion, or of trade: and all the more if the lease was granted in the first half of the eighteenth century, when gold was scarce and the incomes of all classes of the people, measured in money, were very low. The present discounted value of the return of property to the ground landlord a hundred years hence, which will then be worth £1000, is less perhaps than is commonly supposed; though the error is not so great as in the case of anticipations ranging over many hundred years, which were discussed in a recent note: if interest be taken at three per cent, it is about £50; if at five per cent., as was the rule three or four generations ago, it is but £8.

See IV. III. 7.

Houses built in flats are often provided with a lift which is run at the expense of the owner of the house, and in such cases, at all events in America, the top floor sometimes lets for a higher rent than any other. If the site is very valuable and the law does not limit the height of his house in the interest of his neighbours, he may build very high: but at last he will reach the margin of building. At last he will find that the extra expenses for foundations and thick walls, and for his lift, together with some resulting depreciation of the lower floors, make him stand to lose more than he gains by adding one more floor; the extra accommodation which it only just answers his purpose to supply is then to be regarded as at the margin of building, even though the gross rent be greater for the higher floors than for the lower. Compare the footnote on p. 168.

It will be borne in mind that if a house is not appropriate to its site, its aggregate rent will not exceed its site rent by the full building rent which the house would command on an appropriate site. Similar limitations apply to most composite rents.

The relations between the interests of different classes of workers in the same business and in the same trade, have some affinity to the subject of composite rents. See below VI. VIII. 9, 10.

See above III. IV. 5.

Strictly speaking, the amount produced and the price at which it can be sold, are functions one of another, account being taken of the length of time allowed for the evolution of appropriate plant and organization for production on a large scale. But in real life, the cost of production per unit is deduced from the amount expected to be produced, and not vice versâ. Economists commonly follow this practice; and they follow also the practice of business life in inverting this order with regard to demand. That is, they consider the increase of sales that will follow from a given reduction of price, more frequently than the diminution of price which will be required to effect a given increase of sales.

See IV. IX-XIII.; and especially XI. 5.

This may be expressed by saying that when we are considering an individual producer, we must couple his supply curve—not with the general demand curve for his commodity in a wide market, but—with the particular demand curve of his own special market. And this particular demand curve will generally be very steep; perhaps as steep as his own supply curve is likely to be, even when an increased output will give him an important increase of internal economies.

Of course this rule is not universal. It may be noted, for instance, that the net loss of an omnibus, that is short of passengers throughout its trip, and loses a fourpenny fare, is nearer fourpence than threepence, though the omnibus trade conforms perhaps to the law of constant return. Again, if it were not for the fear of spoiling his market, the Regent Street shoemaker, whose goods are made by hand, but whose expenses of marketing are very heavy, would be tempted to go further below his normal price in order to avoid losing a special order, than a shoe manufacturer who uses much expensive machinery and avails himself generally of the economies of production on a large scale. There are other difficulties connected with the supplementary costs of joint products, e.g. the practice of selling some goods at near prime cost, for the purpose of advertisement (see above V. VII. 2). But these need not be specially considered here.

Abstract reasonings as to the effects of the economies in production, which an individual firm gets from an increase of its output are apt to be misleading, not only in detail, but even in their general effect. This is nearly the same as saying that in such case the conditions governing supply should be represented in their totality. They are often vitiated by difficulties which lie rather below the surface, and are especially troublesome in attempts to express the equilibrium conditions of trade by mathematical formulæ. Some, among whom Cournot himself is to be counted, have before them what is in effect the supply schedule of an individual firm; representing that an increase in its output gives it command over so great internal economies as much to diminish its expenses of production; and they follow their mathematics boldly, but apparently without noticing that their premises lead inevitably to the conclusion that, whatever firm first gets a good start will obtain a monopoly of the whole business of its trade in its district. While others avoiding this horn of the dilemma, maintain that there is no equilibrium at all for commodities which obey the law of increasing return; and some again have called in question the validity of any supply schedule which represents prices diminishing as the amount produced increases. See Mathematical Note XIV where reference is made to this discussion.

See above V. V. 6.

A rise or fall of the demand or supply prices involves of course a rise or fall of the demand or supply curve.

Diagrams are of especial aid in enabling us to comprehend clearly the problems of this chapter.

The effect of a falling-off of normal demand can be traced with the same diagrams, dd' being now regarded as the old and DD' as the new position of this demand curve; ah being the old equilibrium price, and AH the new one.

All this can be most clearly seen by the aid of diagrams, and indeed there are some parts of the problem which cannot be satisfactorily treated without their aid. The three figures 27, 28, 29 represent the three cases of constant and diminishing and increasing returns, respectively.

The whole result is rather complex. But it may be stated thus. Firstly, given the elasticity of demand at A, the increase in the quantity produced and the fall in price will both be the greater, the greater be the return got from additional capital and labour applied to the production. That is, they will be the greater, the more nearly horizontal the supply curve is at A in fig. 28, and the more steeply inclined it is in fig. 29 (subject to the condition mentioned above, that it does not lie below the demand curve to the right of A, and thus turn A into a position of unstable equilibrium). Secondly, given the position of the supply curve at A, the greater the elasticity of demand the greater will be the increase of production in every case; but the smaller will be the fall of price in fig. 28, and the greater the fall of price in fig. 29. Fig. 27 may be regarded as a limiting case of either fig. 28 or 29.

All this reasoning assumes that the commodity either obeys the law of diminishing return or obeys the law of increasing return throughout. If it obeys first one, and then the other, so that the supply curve is at one part inclined positively and at another negatively, no general rule can be laid down as to the effect on price of increased facilities of supply, though in every case this must lead to an increased volume of production. A great variety of curious results may be got by giving the supply curve different shapes, and in particular such as cut the demand curve more than once.

This method of inquiry is not applicable to a tax on wheat in so far as it is consumed by a labouring class which spends a great part of its income on bread; and it is not applicable to a general tax on all commodities: for in neither of these cases can it be assumed that the marginal value of money to the individual remains approximately the same after the tax has been levied as it was before.

This is most clearly seen by aid of a diagram. SS', the old constant return supply curve, cuts DD' the demand curve in A: DSA is the consumers' surplus. Afterwards a tax Ss being imposed the new equilibrium is found at a, and consumers' surplus is Dsa. The gross tax is only the rectangle sSKa, that is, a tax at the rate of Ss on an amount sa of the commodity. And this falls short of the loss of consumers' surplus by the area aKA. The net loss aKA is small or great, other things being equal, as aA is or is not inclined steeply. Thus it is smallest for those commodities the demand for which is most inelastic, that is, for necessaries. If therefore a given aggregate taxation has to be levied ruthlessly from any class it will cause less loss of consumers' surplus if levied on necessaries than if levied on comforts; though of course the consumption of luxuries and in a less degree of comforts indicates ability to bear taxation.

If we now regard ss' as the old supply curve which is lowered to the position SS' by the granting of a bounty, we find the gain of consumers' surplus to be sSAa. But the bounty paid is Ss on an amount SA, which is represented by the rectangle sSAL: and this exceeds the gain of consumers' surplus by the area aLA.

Let the old supply curve be SS' fig. 31, and let the imposition of a tax raise it to ss'; let A and a be the old and new positions of equilibrium, and let straight lines be drawn through them parallel to Ox and Oy, as in the figure. Then the tax being levied, as shown by the figure, at the rate of aE on each unit; and Oh, that is, CK units, being produced in the new position of equilibrium, the gross receipts of the tax will be cFEa, and the loss of consumers' surplus will be cCAa; that is, the gross receipts from the tax will be greater or less than the loss of consumers' surplus as CFEK is greater or less than aKA; and in the figure as it stands it is much greater. If SS' had been so drawn as to indicate only very slight action of the law of diminishing return, that is, if it had been nearly horizontal in the neighbourhood of A, then EK would have been very small; and CFEK would have become less than aKA.

To illustrate this case we may take ss' in fig. 31 to be the position of the supply curve before the granting of the bounty, and SS' to be its position afterwards. Thus a was the old equilibrium point, and A is the point to which the equilibrium moves when the bounty is awarded. The increase of consumers' surplus is only cCAa, while the payments made by the State under the bounty are, as shown by the figure, at the rate of AT on each unit of the commodity; and as in the new position of equilibrium there are produced OH, that is, CA units, they amount altogether to RCAT which includes and is necessarily greater than the increase of consumers' surplus.

Thus taking SS' in fig. 32 to be the old position of the supply curve, and ss' its position after the tax, A to be the old and a the new positions of equilibrium, we have, as in the case of fig. 31, the total tax represented by cFEa, and the loss of consumers' surplus by cCAa; the former being always less than the latter.

To illustrate this case we may take ss' in fig. 32 to be the position of the supply curve before the granting of the bounty, and SS' to be its position afterwards. Then, as in the case of fig. 31, the increase of consumers' surplus is represented by cCAa, while the direct payments made by the State under the bounty are represented by RCAT. As the figure is drawn, the former is much larger than the latter. But it is true that if we had drawn ss' so as to indicate a very slight action of the law of increasing return, that is, if it had been very nearly horizontal in the neighbourhood of a, the bounty would have increased relatively to the gain of consumers' surplus; and the case would have differed but little from that of a bounty on a commodity which obeys the law of constant return, represented in fig. 30.

Compare V. I. 1. Unstable equilibrium may now be left out of account.

In this illustration one of the two things exchanged is general purchasing power; but of course the argument would hold if a poor population of pearl divers were dependent for food on a rich population who took pearls in exchange.

Though not of great practical importance, the case of multiple positions of (stable) equilibrium offers a good illustration of the error involved in the doctrine of maximum satisfaction when stated as a universal truth. For the position in which a small amount is produced and is sold at a high price would be the first to be reached, and when reached would be regarded according to that doctrine as that which gave the absolute maximum of aggregate satisfaction. But another position of equilibrium corresponding to a larger production and a lower price would be equally satisfactory to the producers, and would be much more satisfactory to the consumers; the excess of consumers' surplus in the second case over the first would represent the increase in aggregate satisfaction.

The incidence of a tax on agricultural produce will be discussed later on by the aid of diagrams similar to those used to represent the fertility of land (see IV. III.). Landlords' rent absorbs a share of the aggregate selling price of almost all commodities: but it is most prominent in the case of those which obey the law of diminishing return; and an assumption of no extreme violence will enable fig. 33 (a reproduction of 31) to represent roughly the leading features of the problem.

On the other hand, the direct payments under a bounty would exceed the increase of consumers' surplus, and of landlords' surplus calculated on the above assumptions. For taking ss' to be the original position of the supply curve, and SS' to be its position after the bounty, the new landlords' surplus on these assumptions is CSA, or which is the same thing RsT; and this exceeds the old landlords' rent csa by RcaT. The increase of consumers' surplus is cCAa; and therefore the total bounty, which is RCAT, exceeds the gain of consumers' surplus and landlords' rent together by TaA.

For reasons stated in Appendix II, 3, the assumption on which this reasoning proceeds is inapplicable to cases in which the supply curve is inclined negatively.

Compare III. VI.

It is remarkable that Malthus, Political Economy, ch. III. § 9, argued that, though the difficulties thrown in the way of importing foreign corn during the great war turned capital from the more profitable employment of manufacture to the less profitable employment of agriculture, yet if we take account of the consequent increase of agricultural rent, we may conclude that the new channel may have been one of "higher national, though not higher individual profits." In this no doubt he was right; but he overlooked the far more important injury inflicted on the public by the consequent rise in the price of corn, and the consequent destruction of consumers' surplus. Senior takes account of the interests of the consumer in his study of the different effects of increased demand on the one hand and of taxation on the other in the case of agricultural and manufactured produce (Political Economy, pp. 118-123). Advocates of Protection in countries which export raw produce have made use of arguments tending in the same direction as those given in this Chapter; and similar arguments are now used, especially in America (as for instance by Mr H. C. Adams), in support of the active participation of the State in industries which conform to the law of increasing return. The graphic method has been applied, in a manner somewhat similar to that adopted in the present Chapter, by Dupuit in 1844; and, independently, by Fleeming Jenkin (Edinburgh Philosophical Transactions) in 1871.

Thus DD' being the demand curve, and SS' the curve corresponding to the supply schedule described in the text, let MP2P1 be drawn vertically from any point M in Ox, cutting SS' in P2 and DD' in P1; and from it cut off MP3 = P2P1, then the locus of P3 will be our third curve, QQ', which we may call the monopoly revenue curve. The supply price for a small quantity of gas will of course be very high; and in the neighbourhood of Oy the supply curve will be above the demand curve, and therefore the net revenue curve will be below Ox. It will cut Ox in K and again in H, points which are vertically under B and A, the two points of intersection of the demand and supply curves. The maximum monopoly revenue will then be obtained by finding a point q2 on QQ' such that Lq3 being drawn perpendicular to Ox, OL × Lq3 is a maximum. Lq3 being produced to cut SS' in q2 and DD' in q1, the company, if desiring to obtain the greatest immediate monopoly revenue, will fix the price per thousand feet at Lq1, and consequently will sell OL thousand feet; the expenses of production will be Lq2 per thousand feet, and the aggregate net revenue will be OL × q2q1, or which is the same thing OL × Lq3.

If to the expenses of working a monopoly there be added (by a tax or otherwise) a lump sum independent of the amount produced, the result will be to cause every point on the monopoly revenue curve to move downwards to a point on a constant revenue curve representing a constant revenue smaller by a fixed amount than that on which it lies. Therefore the maximum revenue point on the new monopoly revenue curve lies vertically below that on the old: that is, the selling price and the amount produced remain unchanged, and conversely with regard to a fixed bounty or other fixed diminution of aggregate working expenses. As to the effects of a tax proportional to monopoly revenue, see Note XXIII. in the Mathematical Appendix.

In the text it is supposed that the tax or bounty is directly proportional to the sales: but the argument, when closely examined, will be found to involve no further assumption than that the aggregate tax or bounty increases with every increase in that amount: the argument does not really require that it should increase in exact proportion to that amount.

If it happens, as in fig. 35, that this chief maximum q'3 lies a long way to the right of a smaller maximum q3, then the imposition of a tax on the commodity, or any other change that raised its supply curve throughout, would lower by an equal amount the monopoly revenue curve. Let the supply curve be raised from SS' to the position SS'; and in consequence let the monopoly revenue curve fall from its old position QQ' to ZZ'; then the chief point of maximum revenue will move from q'3 to z3, representing a great diminution of production, a great rise of price and a great injury to the consumers. The converse effects of any change, such as a bounty on the commodity, which lowers its supply price throughout and raises the monopoly revenue curve, may be seen by regarding ZZ' as the old and QQ' as the new position of that curve. It will be obvious on a little consideration (but the fact may with advantage be illustrated by drawing suitable diagrams), that the more nearly the monopoly revenue curve approximates to the shape of a constant revenue curve, the greater will be the change in the position of the maximum revenue point which results from any given alteration in the expenses of production of the commodity generally. This change is great in fig. 35 not because DD' and SS' intersect more than once, but because two parts of QQ', one a long way to the right of the other, lie in the neighbourhood of the same constant revenue curve.

In other words, though L lies necessarily a good deal to the left of H, according to the notation in fig. 34; yet the supply curve for the commodity, if there were no monopoly, might lie so much above the present position of SS' that its point of intersection with DD' would lie much to the left of A in the figure, and might not improbably lie to the left of L. Something has already been said (IV. XI., XII.; and V. XI.), as to the advantages which a single powerful firm has over its smaller rivals in those industries in which the law of increasing return acts strongly; and as to the chance which it might have of obtaining a practical monopoly of its own branch of production, if it were managed for many generations together by people whose genius, enterprise and energy equalled those of the original founders of the business.

The full theoretical treatment of questions relating to the influence exerted on monopoly price by an increase of demand requires the use of mathematics for which the reader is referred to an article on monopolies by Professor Edgeworth in the Giornale degli Economisti for Oct. 1897. But an inspection of fig. 34 will show that a uniform raising of DD' will push L much to the right; and that the resulting position of q1 will probably be lower than before. If, however, a new class of residents come into the district, who are so well to do, that their willingness to travel is very little affected by the railway charges, then the shape of DD' will be altered; its left side will be raised more in proportion than its right; and the new position of q1 may be higher than the old.

In fig. 36 DD', SS', and QQ' represent the demand, supply, and monopoly revenue curves drawn on the same plan as in fig. 34. From P1 draw P1F perpendicular to Oy; then DFP1 is the consumers' surplus derived from the sale of OM thousand feet of gas at the price MP1. In MP1 take a point P4 such that OM × MP4 = the area DFP1: then as M moves from O along Ox, P4 will trace out our fourth curve, OR, which we may call the consumers' surplus curve. (Of course it passes through O, because when the sale of the commodity is reduced to nothing, the consumers' surplus also vanishes.)

If he compromises on the basis that £1 of consumers' surplus is equally desirable with £n of monopoly revenue, n being a proper fraction, let us take a point P6 in P3P5 such that P3P6 = n·P3P5, or, which is the same thing, nMP4. Then OM × MP6 = OM × MP3, + nOM × MP4; that is, it is equal to the monopoly revenue derived from selling an amount OM of the commodity at the price MP1, + n times the consumers' surplus derived from this sale: and is therefore the compromise benefit derived from that sale. The locus of P6 is our sixth curve, QU, which we may call the compromise benefit curve. It touches one of the constant revenue curves in u6; which shows that the compromise benefit attains its maximum when amount OY is sold; or which is the same thing, when the selling price is fixed at the demand price for the amount OY.

That is to say, firstly, OY fig. 36 is always greater than OL; and secondly, the greater n is, the greater OY is. (See Note XXIII. bis in the Mathematical Appendix.)

The words are quoted from a leading article in The Times for July 30, 1874: they fairly represent a great body of public opinion.

Fig. 37 may be taken to represent the case of a proposed Government undertaking in India. The supply curve is above the demand curve during its whole length, showing that the enterprise to which it refers is unremunerative, in the sense that whatever price the producers fix, they will lose money; their monopoly revenue will be a negative quantity. But QT the total benefit curve rises above Ox; and touches a constant revenue curve in t5. If then they offer for sale an amount OW (or, which is the same thing, fix the price at the demand price for OW), the resultant consumers' surplus, if taken at its full value, will outweigh the loss on working by an amount represented by OW × Wt5. But suppose that, in order to make up the deficiency, Government must levy taxes, and that taking account of all indirect expenses and other evils, these cost the public twice what they bring in to the Government, it will then be necessary to count two rupees of the consumers' surplus as compensating for a Government outlay of only one rupee; and in order to represent the net gain of the undertaking on this supposition, we must draw the compromise benefit curve QU as in fig. 36, but putting n = ½. Thus MP6 = MP3 + ½MP4. (Another way of putting the same thing is to say that QU is drawn midway between the monopoly revenue (negative) curve QQ' and the total benefit curve QT.) QU so drawn in fig. 37 touches a constant revenue curve in u6, showing that if the amount OY is offered for sale, or, which is the same thing, if the price is fixed at the demand price for OY, there will result a net gain to India represented by OY × Yu6.

Thus there is a slight analogy between this case and that of composite rent of water power, and the only site on which it could be turned to account (see above V. XI. 7), so far as the indeterminateness of the division of the producer's surplus is concerned. But in this case there is no means of knowing what the producer's surplus will be. Cournot's fundamental equations appear to be based on inconsistent assumptions, see Recherches sur les principes mathématiques des Richesses, Ch. IX. p. 113. Here, as elsewhere, he opened up new ground, but overlooked some of its most obvious features. Prof. H. L. Moore (Quarterly Journal of Economics, Feb. 1906), basing himself partly on the work of Bertrand and Prof. Edgeworth, lays down clearly the assumptions which are appropriate to monopoly problems.

Book III. of Industry and Trade is occupied with a study of problems akin to those which have been sketched in this chapter.

Thus Turgot, who for this purpose may be reckoned with the Physiocrats, says (Sur la Formation et Distribution des Richesses, § VI.), "In every sort of occupation it must come to pass, and in fact it does come to pass, that the wages of the artisan are limited to that which is necessary to procure him a subsistence ... He earns no more than his living (Il ne gagne que sa vie)." When however Hume wrote, pointing out that this statement led to the conclusion that a tax on wages must raise wages; and that it was therefore inconsistent with the observed fact that wages are often low where taxes are high, and vice versâ; Turgot replied (March, 1767) to the effect that his iron law was not supposed to be fully operative in short periods, but only in long. See Say's Turgot, English Ed. pp. 53, etc.

From these premises the Physiocrats logically deduced the conclusion that the only net produce of the country disposable for the purposes of taxation is the rent of land; that when taxes are placed on capital or labour, they make it shrink till its net price rises to the natural level. The landowners have, they argued, to pay a gross price which exceeds this net price by the taxes together with all the expenses of collecting them in detail, and an equivalent for all the impediments which the tax-gatherer puts in the way of the free course of industry; and therefore the landowners would lose less in the long run if, being the owners of the only true surplus that exists, they would undertake to pay direct whatever taxes the King required; especially if the King would consent "laisser faire, laisser passer," that is, to let every one make whatever he chose, and take his labour and send his goods to whatever market he liked.

Wealth of Nations, Bk. I. ch. VIII.

Political Economy, IV. 2. There is some doubt as to the extent of the rise of real wages in the fifteenth century. It is only in the last two generations that the real wages of common labour in England have exceeded two pecks.

Principles, V.

Compare above, IV. III. 8.

Some German economists, who are not socialists, and who believe that no such law exists, yet maintain that the doctrines of Ricardo and his followers stand or fall with the truth of this law; while others (e.g. Roscher, Gesch. der Nat. Oek. in Deutschland, p. 1022) protest against the socialist misunderstandings of Ricardo.

It may be well to quote his words. "The friends of humanity cannot but wish that in all countries the labouring classes should have a taste for comforts and enjoyments, and that they should be stimulated by all legal means in their exertions to procure them. There cannot be a better security against a super-abundant population. In those countries, where the labouring classes have the fewest wants, and are contented with the cheapest food, the people are exposed to the greatest vicissitudes and miseries. They have no place of refuge from calamity; they cannot seek safety in a lower station; they are already so low, that they can fall no lower. On any deficiency of the chief article of their subsistence, there are few substitutes of which they can avail themselves, and dearth to them is attended with almost all the evils of famine." (Principles, ch. V.) It is noteworthy that McCulloch, who has been charged, not altogether unjustly, with having adopted the extremest tenets of Ricardo, and applied them harshly and rigidly, yet chooses for the heading of the fourth Chapter of his Treatise On Wages:—"Disadvantage of Low Wages, and of having the Labourers habitually fed on the cheapest species of food. Advantage of High Wages."

This habit of Ricardo's is discussed in Appendix I. (See also V XIV. 5.) The English classical economists frequently spoke of the minimum of wages as depending on the price of corn. But the term "corn" was used by them as short for agricultural produce in general, somewhat as Petty (Taxes and Contributions, ch. XIV.) speaks of "the Husbandry of Corn, which we will suppose to contain all necessaries of life, as in the Lord's Prayer we suppose the word Bread doth." Of course Ricardo took a less hopeful view of the prospects of the working classes than we do now. Even the agricultural labourer can now feed his family well and have something to spare: while even the artisan would then have required the whole of his wages, at all events after a poor harvest, to buy abundant and good food for his family. Sir W. Ashley insists on the narrowness of Ricardo's hopes as compared with those of our own age; he describes instructively the history of the passage quoted in the last note; and shows that even Lassalle did not attribute absolute rigidity to his brazen law. See Appendix I, 2.

Book II. ch. XI. § 2. He had just complained that Ricardo supposed the standard of comfort to be invariable, having apparently overlooked passages such as that quoted in the last note but one. He was however well aware that Ricardo's "minimum rate of wages" depended on the prevalent standard of comfort, and had no connection with the bare necessaries of life.

Compare V. V., especially §§ 2, 3.

See below, § 10.

See above V. IV. 1—4. A little later we shall have to consider in what respects the hire of human labour differs from the hire of a house or a machine: but, for the present, we may neglect this difference, and look at the problem only in its broad outlines. Even so, some technical difficulties will be passed on the way: and those readers, who, in accordance with the suggestion made at the end of V. VII., have omitted the later chapters of that Book, must be asked, if dissatisfied with the general treatment offered here, to turn back and read V. VIII. and IX.

See the remarks on labour standardization below, VI. XIII. 8, 9.

As we move downwards the figures in (3) constantly diminish; but those in (6) increase, then remain without change, and at last diminish. This indicates that the farmer's interests are equally served by hiring 10 or 11 men; but that they are less well served by hiring 8, or 9, or 12. The eleventh man (supposed to be of normal efficiency) is the marginal man, when the markets for labour and sheep are such that one man can be hired for a year for the price of 20 sheep. If the markets had put that hire at 25 sheep, the numbers in (6) would have been 380, 390, 390, 385 and 376 respectively. Therefore that particular farmer would probably have employed one less shepherd, and sent less sheep to market; and among many sheep farmers there would certainly have been a large proportion who would have done so.

It has been argued at length in regard to similar cases (see V. VIII. 4, 5) that the price which it is just worth while for the farmer to pay for this labour, merely gauges the outcome of multitudinous causes which between them govern the wages of shepherds; as the movements of a safety-valve may gauge the outcome of the multitudinous causes that govern the pressure in a boiler. Theoretically a deduction from this has to be made for the fact that, by throwing twenty extra sheep on the market, the farmer will lower the price of sheep generally, and therefore lose a little on his other sheep. This correction may be of appreciable importance in special cases. But in general discussions such as this, in which we are dealing with a very small addition to the supply thrown by one of many producers on a large market, it becomes very small (mathematically a small quantity of the second order), and may be neglected. (See above, footnote on p. 409.)

Of course the net product of the shepherd in this exceptional case plays no greater part in governing the wages of shepherds, than does that of any of the marginal shepherds on farms where they cannot be profitably employed without considerable extra outlay in other directions; as for land, buildings, implements, labour of management, etc.

Column (4) in the above table is deduced from (1) and (2), just as (3) is. But the table shows how many men the farmer can afford to hire, when they are to be had at wages equivalent to the value of the number of sheep in (3), and therefore goes to the heart of the problem of wages: while (4) has no direct bearing on the problem. When therefore Mr J. A. Hobson, remarking on a similar table of his own (in which however the numbers chosen are inappropriate to the hypothesis which he criticises) says:—"In other words the so-called final or marginal productivity turns out to be nothing other than an average productivity.... The whole notion that there is a marginal productivity ... is entirely fallacious" (The Industrial System, p. 110), he appears to be mistaken.

Compare p. 436.

Such a method of illustrating the net product of a man's labour is not easily applicable to industries in which a great deal of capital and effort has to be invested in gradually building up a trade connection, and especially if they are such as obey the law of increasing return. This is a practical difficulty of the same order as those discussed in V. XII. and Appendix H See also IV. XII.; V. VII. 1, 2; and XI. The influence of an additional man employed in any considerable business on its general economies might also be considered from a purely abstract point of view; but it is too small to be taken seriously. (See the footnote on p. 409.)

The charge made to traders for loans is generally much more than 4 per cent. per annum; but as we shall see in chapter VI. it includes other things besides true net interest. Before the recent great destruction of capital by war, it seemed reasonable to speak of 3 per cent.: but even 4 per cent. may scarcely avail for some years after its close.

Compare V. IV.: also Appendix I, 3; where some remarks are made on Jevons' doctrine of interest.

This statement follows closely the lines of V. IV. and VIII.

Der Isolirte Staat, II. I. p. 123. He argues (ib. p. 124) that therefore "the rate of interest is the element by which the relation of the efficiency of capital to that of human labour is expressed"; and finally, in words, very similar to those, which Jevons, working independently a generation later, adopted for the same purpose, he says (p. 162): "The utility of the last applied little bit of capital defines (bestimmt) the height of the rate of interest." With characteristic breadth of view, von Thünen enunciated a general law of diminishing return for successive doses of capital in any branch of production; and what he said on this subject has even now much interest, though it does not show how to reconcile the fact than an increase in the capital employed in an industry may increase the output more than in proportion, with the fact that a continued influx of capital into an industry must ultimately lower the rate of profits earned in it. His treatment of these and other great economic principles, though primitive in many respects, yet stands on a different footing from his fanciful and unreal assumptions as to the causes that determine the accumulation of capital, and as to the relations in which wages stand to the stock of capital. From these he deduces the quaint result that the natural rate of wages of labour is the geometric mean between the labourer's necessaries, and that share of the product which is due to his labour when aided by capital. By the natural rate he means the highest that can be sustained; if the labourer were to get more than this for a time, the supply of capital would, von Thünen argues, be so checked as to cause him in the long run to lose more than he gained.

As von Thünen was well aware. Ib. p. 127. See also below, VI. II. 9, 10.

See II. III. 2; IV. I. 2; IV. IX. 1.

Recent discussions on the eight hours day have often turned very little on the fatigue of labour; for indeed there is much work in which there is so little exertion, either physical or mental, that what exertion there is counts rather as a relief from ennui than as fatigue. A man is on duty, bound to be ready when wanted, but perhaps not doing an hour's actual work in the day; and yet he will object to very long hours of duty because they deprive his life of variety, of opportunities for domestic and social pleasures, and perhaps of comfortable meals and rest.

See ch. XII. Bad harvests, war prices, and convulsions of credit have at various times compelled some workers, men, women and children, to over-work themselves. And cases of ever-increasing exertion in return for a constantly sinking wage, though not as numerous now as is often alleged, have not been very rare in past times. They may be compared with the exertions of a failing firm to secure some return for their outlay by taking contracts at little more than enough to recompense them for their prime, or special and direct cost. And on the other hand almost every age, our own perhaps less than most others, has stories of people who in a sudden burst of prosperity, have contended themselves with the wages to be earned by very little work, and have thus contributed to bring the prosperity to a close. But such matters must be deferred till after a study of commercial fluctuations. In ordinary times the artisan, the professional man or the capitalist undertaker decides, as an individual or as a member of a trade association, what is the lowest price against which he will not strike.

On all locomotives there is some brass or copper work designed partly for ornament, and which could be omitted or displaced without any loss to the efficiency of the steam-engine. Its amount does in fact vary with the taste of the officials who select the patterns for the engines of different railways. But it might happen that custom required such expenditure; that the custom would not yield to argument, and that the railway companies could not venture to offend against it. In that case, when dealing with periods during which the custom ruled, we should have to include the cost of that ornamental metal work in the cost of producing a certain amount of locomotive horse-power, on the same level with the cost of the piston itself. And there are many practical problems, especially such as relate to periods of but moderate length, in which conventional and real necessaries may be placed on nearly the same footing.

The reiteration in this section has seemed to be unavoidable in consequence of the misunderstandings of the main argument of the present Book by various critics; among whom must be included even the acute Prof. v. Böhm-Bawerk. For in the article recently quoted (see especially Section 5), he seems to hold that a self-contradiction is necessarily involved in the belief that wages correspond both to the net product of labour and also to the cost of rearing and training labour and sustaining its efficiency (or, more shortly, though less appropriately, the cost of production of labour). On the other hand the mutual interactions of the chief economic forces are set forth in an able article by Prof. Carver in the Quarterly Journal of Economics for July 1894; see, also his Distribution of Wealth, ch. IV.

See below, VI. VI. 6.

See IV. VII., summarized in § 10.

The argument of this section is put broadly. For a technical and more thorough treatment the reader is referred to V. X.

See V. VIII. 5; and VI. I. 7.

See above pp. 517, 8. The net product of a factory is now commonly taken, as it is in the official Census of Production, to be the work which it puts into its material: thus the value of its net product is the excess of the gross value of its output over the value of the material used by it.

Differences between the adjustments of demand and supply in the case of commodities and in the case of labour are discussed in the following chapters.

We are leaving on one side here the competition for employment between labour in the narrower sense of the term, and the work of the undertaker himself and his assistant managers and foremen. A great part of chs. VII. and VIII. is given to this difficult and important problem.

Capital is here reckoned broadly: it is not confined to trade capital. This point is of secondary interest and is relegated to Appendix J, 4.

Such a survey is focussed in Notes XIV.—XXI. of the Mathematical Appendix: the last of them is easy of comprehension, and shows the complexity of the problems. Most of the rest are developments of details arising out of Note XIV., the substance of part of which is translated into English in V. IV.

About fifty years ago correspondence between farmers in the North and the South of England led to an agreement that putting roots into a cart was an excellent measure of physical efficiency: and careful comparison showed that wages bore about the same proportion to the weights which the labourers commonly loaded in a day's work in the two districts. The standards of wages and of efficiency in the South are perhaps now more nearly on a level with those in the North than they were then. But the standard trade union wages are generally higher in the North than in the South: and many men, who go North to reach the higher rate, find that they cannot do what is required, and return.

This argument would be subject to corrections in cases in which the trade admitted of the employment of more than one shift of workpeople. It would often be worth an employer's while to pay to each of two shifts as much for an eight hours' day as he now pays to one shift for a ten hours' day. For though each worker would produce less, each machine would produce more on the former than on the latter plan. But to this point we shall return.

Ricardo did not overlook the importance of the distinction between variations in the amount of commodities paid to the labourer as wages, and variations in the profitableness of the labourer to his employer. He saw that the real interest of the employer lay not in the amount of wages that he paid to the labourer, but in the ratio which those wages bore to the value of the produce resulting from the labourer's work: and he decided to regard the rate of wages as measured by this ratio: and to say that wages rose when this ratio increased, and that they fell when it diminished. It is to be regretted that he did not invent some new term for this purpose; for his artificial use of a familiar term has seldom been understood by others, and was in some cases even forgotten by himself. (Compare Senior's Political Economy, pp. 142-8.) The variations in the productiveness of labour which he had chiefly in view were those which result from improvements in the arts of production on the one hand, and on the other from the action of the law of diminishing return, when an increase of population required larger crops to be forced from a limited soil. Had he paid careful attention to the increase in the productiveness of labour that results directly from an improvement in the labourer's condition, the position of economic science, and the real wellbeing of the country, would in all probability be now much further advanced than they are. As it is, his treatment of wages seems less instructive than that in Malthus' Political Economy.

Wealth of Nations, I. V.

The Report of the Poor Law Commissioners on the Employment of Women and Children in Agriculture, 1843, p. 297, contains some interesting specimens of yearly wages paid in Northumberland, in which very little money appeared. Here is one:—10 bushels of wheat, 30 of oats, 10 of barley, 10 of rye, 10 of peas; a cow's keep for a year; 800 yards of potatoes; cottage and garden; coal-shed; £3. 10s. in cash; and 2 bushels of barley in lieu of hens.

See II. IV. 7.

This class of questions is closely allied to those raised when discussing the definitions of Income and Capital in Book II.; where a caution has already been entered against overlooking elements of income that do not take the form of money. Earnings of many even of the professional and wage-receiving classes are in a considerable measure dependent on their being in command of some material capital.

Employers, whose main business is in a healthy condition, are generally too busy to be willing to manage such shops unless there is some strong reason for doing so; and consequently in old countries those who have adopted the Truck system, have more often than not done so with the object of getting back by underhand ways part of the wages which they have nominally paid. They have compelled those who work at home to hire machinery and implements at exorbitant rents; they have compelled all their workpeople to buy adulterated goods at short weights and high prices; and in some cases even to spend a very large part of their wages on goods on which it was easiest to make the highest rate of profits, and especially on spirituous liquors. Mr Lecky, for instance, records an amusing case of employers who could not resist the temptation to buy theatre tickets cheap, and compel their workpeople to buy them at full price (History of the Eighteenth Century, VI. p. 158). The evil is however at its worst when the shop is kept not by the employer, but by the foreman or by persons acting in concert with him; and when he, without openly saying so, gives it to be understood that those, who do not deal largely at the shop, will find it difficult to get his good word. For an employer suffers more or less from anything that injures his workpeople, while the exactions of an unjust foreman are but little held in check by regard for his own ultimate interest.

These considerations are specially important with regard to piece-work; the rates of earnings being in some cases much reduced by short supplies of material to work on, or by other interruptions, avoidable or unavoidable.

The evils of irregularity of employment are trenchantly stated in a lecture on that subject given by Prof. Foxwell in 1886.

Workers in the higher grades are generally allowed holidays with pay; but those in the lower grades generally forfeit their pay when they take holidays. The causes of this distinction are obvious; but it naturally raises a feeling of grievance of a kind, to which the inquiries by the Labour Commission gave vent. See e.g. Group B. 24, 431-6.

See II. IV. 2.

It ought, however, to be remarked that some of the beneficial effects of custom are cumulative. For among the many different things that are included under the wide term "custom" are crystallized forms of high ethical principles, rules of honourable and courteous behaviour, and of the avoidance of troublesome strife about paltry gains; and much of the good influence which these exert on race character is cumulative. Compare I II. 1, 2.

This is consistent with the well-known fact that slave labour is not economical, as Adam Smith remarked long ago that "The fund destined for replacing or repairing, if I may say so, the wear-and-tear of the slave is commonly managed by a negligent master or careless overseer. That destined for performing the same office for the free man is managed by the free man himself ... with strict frugality and parsimonious attention."

Sir William Petty discussed "The Value of the People" with much ingenuity; and the relation in which the cost of rearing an adult male stands to the cost of rearing a family unit was examined in a thoroughly scientific manner by Cantillon, Essai, Part I. chap. XI., and again by Adam Smith, Wealth of Nations, Book I. ch. VIII.: and in more recent times by Dr Engel, in his brilliant Essay Der Preis der Arbeit, and by Dr Farr and others. Many estimates have been made of the addition to the wealth of a country caused by the arrival of an immigrant whose cost of rearing in his early years was defrayed elsewhere, and who is likely to produce more than he consumes in the country of his adoption. The estimates have been made on many plans, all of them rough, and some apparently faulty in principle: but most of them find the average value of an immigrant to be about £200. It would seem that, if we might neglect provisionally the difference between the sexes, we should calculate the value of the immigrant on the lines of the argument of V. IV. 2. That is, we should "discount" the probable value of all the future services that he would render; add them together, and deduct from them the sum of the "discounted" values of all the wealth and direct services of other persons that he would consume: and it may be noted that in thus calculating each element of production and consumption at its probable value, we have incidentally allowed for the chances of his premature death and sickness, as well as of his failure or success in life. Or again we might estimate his value at the money cost of production which his native country had incurred for him; which would in like manner be found by adding together the "accumulated" values of all the several elements of his past consumption and deducting from them the sum of the "accumulated" values of all the several elements of his past production.

Many writers assume, implicitly at least, that the net production of an average individual and the consumption during the whole of his life are equal; or, in other words, that he would neither add to nor take from the material well-being of a country, in which he stayed all his life. On this assumption the above two plans of estimating his value would be convertible; and then of course we should make our calculations by the latter and easier method. We may, for instance, guess that the total amount spent on bringing up an average child of the lower half of the labouring classes, say two-fifths of the population, is £100; for the next fifth we may put the sum at £175; for the next fifth at £300; for the next tenth at £500, and the remaining tenth at £1200: or an average of £300. But of course some of the population are very young and have had but little spent on them; others have got nearly to their life's end; and therefore, on these assumptions, the average value of an individual is perhaps £200.

See above, VI. III.

On the subject of this Section compare Book V. II. 3, and Appendix F on Barter. Prof. Brentano was the first to call attention to several of the points discussed in this chapter. See also Howell's Conflicts of Capital and Labour.

On the subject of this section compare Bk. IV. VI. 8; Mr Charles Booth's Life and Labour in London; and Sir H. Ll. Smith's Modern Changes in the Mobility of Labour.

There is some ground for regarding this special return as a quasi-rent. See VI. V. 7 and VIII. 8.

Compare above, VI. II. 2. If they have any considerable stock of trade implements, they are to that extent capitalists; and part of their income is quasi-rent on this capital.

Comp. V. X. 2.

That the supply of capital is held back by the prospectiveness of its uses, men's unreadiness to look forward, while the demand for it comes from its productiveness, in the broadest sense of the term, is indicated in II. IV.

See Book III. V. 3, 4; and IV. VII. 8. It is a good corrective of this error to note how small a modification of the conditions of our own world would be required to bring us to another in which the mass of the people would be so anxious to provide for old age and for their families after them, and in which the new openings for the advantageous use of accumulated wealth in any form were so small, that the amount of wealth for the safe custody of which people were willing to pay would exceed that which others desired to borrow; and where in consequence even those who saw their way to make a gain out of the use of capital, would be able to exact a payment for taking charge of it; and interest would be negative all along the line.

Compare III. V. and IV. VII.

Prof. v. Böhm-Bawerk appears to have underrated the acumen of his predecessors in their writings on capital and interest. What he regards as mere naïve fragments of theories appear rather to be the utterances of men well acquainted with the practical workings of business; and who, partly for some special purpose, and partly through want of system in exposition, gave such disproportionate stress to some elements of the problem as to throw others into the background. Perhaps part of the air of paradox with which he invests his own theory of capital may be the result of a similar disproportionate emphasis, and an unwillingness to recognize that the various elements of the problem mutually govern one another. Attention has already been called to the fact that, though he excludes houses and hotels, and indeed everything that is not strictly speaking an intermediate good, from his definition of capital, yet the demand for the use of goods, that are not intermediate, acts as directly on the rate of interest, as does that for capital as defined by him. Connected with this use of the term capital is a doctrine on which he lays great stress, viz. that "methods of production which take time are more productive" (Positive Capital, Book V. ch. IV. p. 261), or again that "every lengthening of a roundabout process is accompanied by a further increase in the technical result" (Ib. Book II. ch. II. p. 84). There are however innumerable processes which take a long time and are roundabout; but are not productive and therefore are not used; and in fact he seems to have inverted cause and effect. The true doctrine appears to be that, because interest has to be paid for, and can be gained by the use of capital; therefore those long and roundabout methods, which involve much locking up of capital, are avoided unless they are more productive than others. The fact that many roundabout methods are in various degrees productive is one of the causes that affect the rate of interest; and the rate of interest and the extent to which roundabout methods are employed are two of the elements of the central problem of distribution and exchange that mutually determine one another. See Appendix I, 3.

From St Chrysostom's Fifth Homily, see above I. II. 8. Compare also Ashley's Economic History, VI. VI.; and Bentham On Usury. The sentiment against usury had its origin in tribal relationships, in many other cases besides that of the Israelites, perhaps in all cases; and, as Cliffe Leslie remarks (Essays, 2nd Edition, p. 244):—It was "inherited from prehistoric times, when the members of each community still regarded themselves as kinsmen; when communism in property existed at least in practice, and no one who had more than he needed could refuse to share his superfluous wealth with a fellow-tribesman in want."

They also make a distinction between hiring things which were themselves to be returned, and borrowing things the equivalent of which only had to be returned. This distinction, however, though interesting from an analytical point of view, has very little practical importance.

Archdeacon Cunningham has described well the subtleties by which the mediæval church explained away her prohibition of loans at interest, in most of those cases in which the prohibition would have been seriously injurious to the body politic. These subtleties resemble the legal fictions by which the judges have gradually explained away the wording of laws, the natural interpretation of which seemed likely to be mischievous. In both cases some practical evil has been avoided at the expense of fostering habits of confused and insincere thought.

This is Marx's phrase. Rodbertus had called it a "Plus."

See Appendix I, 2.

Mortgages for long periods are sometimes more sought after by lenders than those for short periods, and sometimes less. The former save the trouble of frequent renewal, but they deprive the lender of command over his money for a long time, and thus limit his freedom. First-class stock-exchange securities combine the advantages of very long and very short mortgages. For their holder can hold them as long as he likes, and can convert them into money when he will; though, if at the time credit is shaken and other people want ready money, he will have to sell at a loss. If they could always be realized without a loss, and if there were no broker's commissions to be paid on buying and selling, they would not yield a higher income than money lent "on call" at the lender's choice of time; and that will always be less than the interest on loans for any fixed period, short or long.

Again, Dr Jessop (Arcady, p. 214) tells us "there are hosts of small money-lenders in the purlieus of the cattle markets who make advances to speculators with an eye," lending sums, amounting in exceptional cases up to £200, at a gross interest of ten per cent. for the twenty-four hours.

See also below, ch. VIII. § 2.

Compare Fisher's Appreciation and Interest 1896: and The rate of interest 1907, especially Chapters V, XIV and their respective Appendices.

See p. 313.

See IV. VIII.

With this argument may be compared that of VI. I. 7.

Comp. IV. XII. 3.

The employer of a large number of workmen has to economize his energies on the same plan that is followed by the leading officers of a modern army. For as Mr Wilkinson says (The Brain of an Army, pp. 42-6):—"Organization implies that every man's work is defined, that he knows exactly what he must answer for, and that his authority is coextensive with his responsibility ... [In the German army] every commander above the rank of captain deals with a body composed of units, with the interior affairs of none of which he meddles, except in the case of failure on the part of the officer directly responsible.... The general commanding an army corps has to deal directly with only a few subordinates.... He inspects and tests the condition of all the various units, but ... he is as far as possible unhampered by the worry of detail. He can make up his mind coolly." Bagehot in characteristic fashion had remarked (Lombard Street, ch. VIII.) that if the head of a large business "is very busy, it is a sign of something wrong"; and had compared (Essay on the Transferability of Capital) the primitive employer with a Hector or Achilles mingling in the fray, and the typical modern employer with "a man at the far end of a telegraph wire—a Count Moltke with his head over some papers—who sees that the proper persons are slain, and who secures the victory."

Comp. IV. XI. 4.

Lombard Street, Introductory chapter.

See IV. XII. 9, 10.

IV. XII. 12. When the forms of productions cease to be few and simple, it becomes "no longer true that a man becomes an employer because he is a capitalist. Men command capital because they have the qualifications to profitably employ labour. To these captains of industry ... capital and labour resort for opportunity to perform their several functions." (Walker, Wages Question, ch. XIV.)

Bagehot, Postulates, p. 75.

Bagehot (l. c. pp. 94-5) says that the great modern commerce has "certain general principles which are common to all kinds of it, and a person can be of considerable use in more than one kind if he understands these principles and has the proper sort of mind. But the appearance of this common element is in commerce, as in politics, a sign of magnitude, and primitive commerce is all petty. In early tribes there is nothing but the special man—the clothier, the mason, the weapon-maker. Each craft tried to be, and very much was, a mystery except to those who carried it on. The knowledge required for each was possessed by few, kept secret by these few, and nothing else was of use but this monopolised and often inherited acquirement; there was no 'general' business knowledge. The idea of a general art of money making is very modern; almost everything ancient about it is individual and particular."

Fortnightly Review, June 1879, reprinted in his Essays.

See VI. IV. 3. On the general functions of those who undertake the chief responsibilities of business, see Brentano, Der Unternehmer, 1907.

Wealth of Nations, Book I. ch. X. Senior, Outlines, p. 203, puts the normal rate of profits on a capital of £100,000 at less than 10 per cent., on one of £10,000 or £20,000 at about 15 per cent., on one of £5,000 or £6,000 at 20 per cent., and "a much larger per-centage" on smaller capitals. Compare also § 4 of the preceding Chapter of the present Book. It should be noted that the nominal rate of profits of a private firm is increased when a manager, who brings no capital with him, is taken into partnership and rewarded by a share of the profits instead of a salary.

On risk as an element of cost see V. VII. 4. There would be an advantage in a careful analytical and inductive study of the attractive or repellent force which various kinds of risks exert on persons of various temperaments, and as a consequence on earnings and profits in risky occupations; it might start from Adam Smith's remarks on the subject.

There is a great difficulty in ascertaining even approximately the amounts of capital of different kinds invested in different classes of business. But guided mainly by the valuable statistics of American Bureaux, inexact as they avowedly are in this particular matter, we may conclude that the annual output is less than the capital in industries where the plant is very expensive, and the processes through which the raw material has to go are very long, as watch and cotton factories: but that it is more than four times the capital in businesses in which the raw material is expensive and the process of production rapid, e.g. boot factories; as well as in some industries, which make only a slight change in the form of their material, such as sugar-refining, and slaughtering and meat-packing.

Many of these inequalities disappear if the value of the raw material, coal, etc. used in a business is deducted before reckoning its output. This plan is commonly followed by careful statisticians in estimating the manufacturing output of a country, so as to avoid counting say yarn and cloth twice over; and similar reasons should make us avoid counting both cattle and fodder crops in the agricultural product of a country. This plan is however not quite satisfactory. For logically one ought to deduct the looms which a weaving factory buys as well as its yarn. Again, if the factory itself was reckoned as a product of the building trades, its value should be deducted from the output (over a term of years) of the weaving trade. Similarly with regard to farm buildings. Farm horses ought certainly not to be counted, nor for some purposes any horses used in trade. However the plan of deducting nothing but raw material has its uses, if its inaccuracy is clearly recognized.

See above IV. XI. 2-4.

See above p. 483.

Compare pp. 319, 320.

He would however not need to charge a high rate of profits per annum on that part of his capital which he had sunk in the earlier stages of building the ship; for that capital, when once invested, would no longer require any special exercise of his ability and industry, and it would be sufficient for him to reckon his outlay "accumulated" at a high rate of compound interest; but in that case he must count the value of his own labour as part of his early outlay. On the other hand, if there be any trade in which a continuous and nearly uniform expenditure of trouble is called for on all the capital invested, then it would be reasonable in that trade to find the "accumulated" value of the earlier investments by the addition of a "compound" rate of profit (i.e. a rate of profit increasing geometrically as compound interest does). And this plan is frequently adopted in practice for the sake of simplicity even where it is not theoretically quite correct.

Strictly speaking it will be a little greater than the sum of these three, because it will include compound interest over a longer period.

The fishmongers and greengrocers in working-class quarters especially lay themselves out to do a small business at a high rate of profits; because each individual purchase is so small that the customer would rather buy from a dear shop near at hand than go some way to a cheaper one. The retailer therefore may not be getting a very good living though he charges a penny for what he bought for less than a halfpenny. The same thing was however perhaps sold by the fisherman or the farmer for a farthing or even less: and the direct lost of carriage and insurance against loss will not account for any great part of this last difference. Thus there seems to be some justification for the popular opinion that the middlemen in these trades have special facilities for obtaining abnormally high profits by combination among themselves.

The expert evidence that is given in such cases is full of instruction to the economist in many ways, and in particular because of the use of mediæval phrases as to the customs of the trade, with a more or less conscious recognition of the causes which have produced those customs, and to which appeal must be made in support of their continued maintenance. And it almost always comes out finally that if the "customary" rate of profit on the turnover is higher for one class of job than another, the reason is that the former does (or did a little while ago) require a longer locking-up of capital; or a greater use of expensive appliances (especially such as are liable to rapid depreciation, or cannot be kept always employed, and therefore must pay their way on a comparatively small number of jobs); or that it requires more difficult or disagreeable work, or a greater amount of attention on the part of the undertaker; or that it has some special element of risk for which insurance has to be made. And the unreadiness of experts to bring to light these justifications of custom, which are lying almost hidden from themselves in the recesses of their own minds, gives ground for the belief that if we could call to life and cross-examine mediæval business men, we should find much more half-conscious adjustment of the rate of profit to the exigencies of particular cases than has been suggested by historians. Many of them fail sometimes to make it clear whether the customary rate of profits of which they are speaking is a certain rate on the turnover, or such a rate on the turnover as will afford in the long run a certain rate of profits per annum on the capital. Of course the greater uniformity of the methods of business in mediæval times, would enable a tolerably uniform rate of profits on the capital per annum to exist without causing so great variations in the rate on the turnover as are inevitable in modern business. But still it is clear that if one kind of rate of profits were nearly uniform, the other would not be; and the value of much that has been written on mediæval economic history seems to be somewhat impaired by the absence of a distinct recognition of the differences between the two kinds, and between the ultimate sanctions on which customs relating severally to them must depend.

A century ago many Englishmen returned from the Indies with large fortunes, and the belief spread that the average rate of profits to be made there was enormous. But, as Sir W. Hunter points out (Annals of Rural Bengal, ch. VI.), the failures were numerous, but only "those who drew prizes in the great lottery returned to tell the tale." And at the very time when this was happening, it used commonly to be said in England that the families of a rich man and his coach-man would probably change places within three generations. It is true that this was partly due to the wild extravagance common among young heirs at that time, and partly to the difficulty of finding secure investments for their capital. The stability of the wealthy classes of England has been promoted almost as much by the spread of sobriety and education as by the growth of methods of investment, which enable the heirs of a rich man to draw a secure and lasting income from his wealth though they do not inherit the business ability by which he acquired it. There are however even now districts in England, in which the majority of manufacturers are workmen or the sons of workmen. And in America, though foolish prodigality is perhaps less common than in England, yet the greater changefulness of conditions, and the greater difficulty of keeping a business abreast of the age, have caused it commonly to be said that a family passes "from shirt sleeves to shirt sleeves" in three generations. Wells says (Recent Economic Changes, p. 351), "There has long been a substantial agreement among those competent to form an opinion, that ninety per cent. of all the men who try to do business on their own account fail of success." And Mr J. H. Walker gives (Quarterly Journal of Economics, Vol. II. p. 448) some detailed statistics with regard to the origin and careers of the manufacturers in the leading industries of Worcester in Massachusetts between 1840 and 1888. More than nine-tenths of them began life as journeymen; and less than ten per cent. of the sons of those who were on the list of manufacturers in 1840, 1850 and 1860, had any property in 1888, or had died leaving any. And as to France, M. Leroy Beaulieu says (Répartition des Richesses, ch. XI.) that out of every hundred new businesses that are started twenty disappear almost at once, fifty or sixty vegetate, neither rising nor falling, and only ten or fifteen are successful.

The late General Walker rendered excellent service in explaining the causes that govern wages on the one hand and earnings of management on the other. But he maintained (Political Economy, §311) that profits do not form a part of the price of manufactured products; and he does not limit that doctrine to short periods, for which, as we have seen, the income derived from all skill, whether exceptional or not, whether that of an employer or a workman, may be regarded as a quasi-rent. He uses indeed the word "profits" in an artificial sense; for, having excluded interest altogether from profits, he assumes that the "No-profits employer" earns "on the whole or in the long run the amount which he could have expected to receive as wages if employed by others" (First Lessons, 1889, § 190): that is to say, the "No-profits employer" obtains, in addition to interest on his capital, normal net earnings of management of men of his ability whatever that may be. Thus profits in Walker's sense exclude four-fifths of what are ordinarily classed as profits in England (the proportion would be rather less in America, and rather more on the Continent than in England). So that his doctrine would appear to mean only that that part of the employer's income, which is due to exceptional abilities or good fortune, does not enter into price. But the prizes as well as the blanks of every occupation, whether it be that of an employer or not, take their part in determining the number of persons who seek that occupation and the energy with which they give themselves to their work: and therefore do enter into normal supply price. Walker appears to rest his argument mainly on the important fact, which he has done much to make prominent, that the ablest employers, who in the long run get the highest profits, are as a rule those who pay the highest wages to the workman and sell at the lowest price to the consumer. But it is an equally true and an even more important fact that those workmen who get the highest wages are as a rule those who turn their employers' plant and material to best account (see VI. III. 2), and thus enable him both to get high profits for himself and to charge low prices to the consumer.

Compare V. X. 8.

When a firm has a speciality of its own, many even of its ordinary workmen would lose a great part of their wages by going away, and at the same time injure the firm seriously. The chief clerk may be taken into partnership, and the whole of the employees may be paid partly by a share in the profits of the concern; but whether this is done or not, their earnings are determined, not so much by competition and the direct action of the law of substitution, as by a bargain between them and their employers, the terms of which are theoretically arbitrary. In practice however they will probably be governed by a desire to "do what is right," that is, to agree on payments that represent the normal earnings of such ability, industry and special training as the employees severally possess, with something added if the fortunes of the firm are good, and something subtracted if they are bad.

But compare V. XI. 2 for exceptions to the rule as to situation rent.

IV. III. 3. Thus we see that if the value of produce rises from OH' to OH (figs. 12, 13, 14), so that while an amount of produce OH was required to remunerate a dose of capital and labour before the rise, an amount OH' would suffice after the rise, then the producer's surplus will be increased a little in the case of lands of the class represented in fig. 12, with regard to which the tendency to diminishing return acts quickly; much more with regard to the second class of lands (fig. 13), and most of all with regard to the third class (fig. 14).

Ib. § 4. Comparing two pieces of land (figs. 16 and 17) with regard to which the tendency to diminishing return acts in a similar way, but of which the first is rich and the second poor, we found that the rise of producer's surplus from AHC to AH'C', caused by a rise in the price of produce in the ratio OH to OH', was much larger in proportion in the second case.

England is so small and so thickly peopled, that even milk and vegetables which require to be marketed quickly, and even hay in spite of its bulk, can be sent across the country at no inordinate expense: while for the staple products, corn and live stock, the cultivator can get nearly the same net price in whatever part of England he is. For this reason English economists have ascribed to fertility the first rank among the causes which determine the value of agricultural land; and have treated situation as of secondary importance. They have therefore often regarded the producer's surplus, or rental value, of land as the excess of the produce which it yields, over what is returned to equal capital and labour (applied with equal skill) to land that is so barren as to be on the margin of cultivation; without taking the trouble to state explicitly either that the two pieces of land must be in the same neighbourhood, or that separate allowance must be made for differences in the expense of marketing. But this method of speaking did not come naturally to economists in new countries, where the richest land might lie uncultivated, because it had not good access to markets. To them situation appeared at least equally important with fertility in determining the value of land. In their view land on the margin of cultivation, was land far from markets; and, especially, land far from railways that lead to good markets: and the producer's surplus presented itself to them as the excess value of the produce from well-situated land over that which equal labour, capital (and skill), would get on the worst-situated land; allowance being of course made for differences of fertility, if necessary. In this sense the United States cannot any longer be regarded as a new country: for all the best land is taken up, and nearly all of it has obtained access by cheap railways to good markets.

Footnote to his third Chapter.

Petty's memorable statement of the law of rent (Taxes and Contributions, IV. 13) is so worded as to apply to all forms of tenure and to all stages of civilization:—"Suppose a man could with his own hands plant a certain scope of Land with Corn, that is, could Digg, or Plough; Harrow, Weed, Reap, Carry home, Thresh, and Winnow, so much as the Husbandry of this Land requires; and had withal Seed wherewith to sow the same. I say, that when this man hath subducted his seed out of the proceed of his Harvest, and also what himself hath both eaten and given to others in exchange for Clothes, and other Natural necessaries; that the Remainder of Corn, is the natural and true Rent of the Land for that year; and the medium of seven years, or rather of so many years as make up the Cycle, within which Dearths and Plenties make their revolution, doth give the ordinary Rent of the Land in Corn."

In technical language it is the distinction between the quasi-rents which do not, and the profits which do, directly enter into the normal supply prices of produce for periods of moderate length.

The sleeping partner may be a village community; but recent investigations, especially those of Mr Seebohm, have given cause for believing that the communities were not often "free" and ultimate owners of the land. For a summary of the controversy as to the part which the village community has played in the history of England the reader is referred to the first chapter of Ashley's Economic History. Mention has already been made of the ways in which primitive forms of divided ownership of the land hindered progress, I. II. 2.

The firm may be further enlarged by the introduction of an intermediary who collects payments from a number of cultivators, and after deducting a certain share, hands them over to the head of the firm. He is not a middleman in the sense in which the word is used ordinarily in England; that is, he is not a subcontractor, liable to be dismissed at the end of a definite period for which he has contracted to collect the payments. He is a partner in the firm, having rights in the land as real as those of the head partner, though, it may be, of inferior value. The case may be even more complex than this. There may be many intermediate holders between the actual cultivators and the person who holds direct from the State. The actual cultivators also vary greatly in the character of their interests; some having a right to sit at fixed rents and to be altogether exempt from enhancement, some to sit at rents which are enhanceable only under certain prescribed conditions, some being mere tenants from year to year.

Prof. Maitland in the article on Court Rolls in the Dictionary of Political Economy observes that "we shall never know how far the tenure of the mediæval tenant was precarious until these documents have been examined."

Thus Mr Pusey's Committee of the House of Commons in 1848 reported, "That different usages have long prevailed in different counties and districts of the country, conferring a claim on an outgoing tenant for various operations of husbandry.... That these local usages are imported into leases or agreements, ... unless the terms of the agreement expressly, or by implication, negative such a presumption. That in certain parts of the country a modern usage has sprung up, which confers a right on the outgoing tenant to be reimbursed certain expenses ... other than those above referred to.... That this usage appears to have grown out of improved and spirited systems of farming, involving a large outlay of capital.... That these [new] usages have gradually grown into general acceptance in certain districts, until they have ultimately become recognized there as the custom of the country." Many of them are now enforced by law. See below, § 10.

Thus the value of a service of a certain number of days' work would depend partly on the promptness with which the labourer left his own hayfield when called to that of his landlord, and on the energy he put into his work. His own rights, such as that of cutting wood or turf, were elastic; and so were those of his landlord which bound him to allow flocks of pigeons to devour his crops unmolested, to grind his corn in the lord's mill, and to pay tolls levied on the lord's bridges and in his markets. Next, the fines or presents, or "abwabs" as they are called in India, which the tenant might be called on to pay, were more or less elastic, not only in their amounts but in the occasions on which they were levied. Under the Moguls the tenants in chief had often to pay a vast number of such imposts in addition to their nominally fixed share of the produce: and they passed these on, increased in weight and with additions of their own, to the inferior tenants. The British Government has not levied them itself; but it has not been able, in spite of many efforts, to protect the inferior tenants from them. For instance, in some parts of Orissa, Sir W. W. Hunter found that the tenants had to pay, besides their customary rent, 33 different cesses. They paid whenever one of their children married, they paid for leave to erect embankments, to grow sugar-cane, to attend the festival of Juggernaut, etc. (Orissa, I. 55-9.)

In India at the present time we see very various forms of tenure existing side by side, sometimes under the same name and sometimes under different names. There are places in which the raiyats and the superior holders own between them the property in the land subject to definite dues to Government, and where the raiyat is safe not only from being ejected, but also from being compelled by fear of violence to pay over to his superior holder more than that share of the producer's surplus, which custom strictly prescribes. In that case the payment which he makes is, as has already been said, simply the handing over to the other partner in the firm of that share of the receipts of the firm which under the unwritten deed of partnership belongs to him. It is not a rent at all. This form of tenure, however, exists only in those parts of Bengal in which there have been no great recent dislocations of the people, and in which the police are sufficiently active and upright to prevent the superior holders from tyrannizing over the inferior.

The whole history of India records little of that quiet stability which has come over the rural parts of England since war, famine, and plague have ceased to visit us. Extensive movements seem to have been nearly always in progress, partly in consequence of the recurrence of famines (for, as the Statistical Atlas of India shows, there are very few districts which have not been visited at least once by a severe famine during this century); partly of the devastating wars which one set of conquerors after another has inflicted on the patient people; and partly of the rapidity with which the richest land reverts to a thick jungle. The land which has supported the largest population is that which, when deprived of its human inhabitants, most quickly provides shady harbours for wild beasts, for venomous snakes, and for malaria; these prevent the return of the refugees to their old homes, and cause them often to wander far before they settle. When land has been depopulated, those who have the control over it, whether the Government or private persons, offer very favourable terms in order to attract cultivators from elsewhere; this competition for tenants very much influences the relations of cultivators and superior holders for a long distance around them; and therefore, in addition to the changes of customary tenure, which, though impalpable at any time, have been always going on, there have been in almost every place many epochs in which the continuity even of the former custom has been broken and keen competition has reigned supreme.

These disturbing forces of war, famine, and plague were frequent in mediæval England, but their violence was less. And further, the rate of movement of nearly all changes in India has been greater than it would have been if the average period of a generation were as long as in the colder climate of England. Peace and prosperity therefore enable Indian populations to recover from their calamities more quickly; and the traditions which each generation holds of the doings of its fathers and grandfathers run back for a shorter time, so that usages of comparatively recent growth are more easily believed to have the sanction of antiquity. Change can move faster without being recognized as change.

Modern analysis may be applied to the contemporary conditions of land tenure in India and other Oriental countries, the evidence as to which we can examine and cross-examine, in such a way as to throw light on the obscure and fragmentary records of mediæval land tenures, which may indeed be examined, but cannot be cross-examined. There is of course great danger in applying modern methods to primitive conditions: it is easier to misapply them than to apply them rightly. But the assertion, which has been sometimes made, that they cannot be usefully applied at all appears to be based on a conception of the aims, methods and results of analysis, which has little in common with that presented in this, and other modern treatises. See A Reply in the Economic Journal, Sept. 1892.

The term Metayer applies properly only to cases in which the landlord's share of the produce is one-half; but it is usually applied to all arrangements of this kind whatever the landlord's share be. It must be distinguished from the Stock lease system in which the landlord provided part at least of the stock, but the tenant managed the farm entirely, at his own risk subject to a fixed annual payment to the landlord for land and stock. In mediæval England this system was much used, and the Metayer system appears not to have been unknown. (See Rogers, Six Centuries of Work and Wages, ch. X.)

In 1880 74 per cent. of the farms of the United States were cultivated by their owners, 18 per cent., or more than two-thirds of the remainder, were rented for a share of the produce, and only 8 per cent. were held on the English system. The largest proportion of farms that were cultivated by persons other than their owners were in the Southern States. In some cases the landowner—the farmer as he is called there—supplies not only horses and mules, but their feed; and in that case the cultivator—who in France would be called not a Metayer but a Maître Valet—is almost in the position of a hired labourer paid by a share of what he gets; as is for instance a hired fisherman whose pay is the value of a part of the catch. The tenant's share varies from one-third, where the land is rich and the crops such as to require little labour, to four fifths, where there is much labour and the landlord supplies little capital. There is much to be gained from a study of the many various plans on which the share contract is based.

The relations between publisher and author on the "half-profits" system resemble in many ways those between landlord and metayer.

This can be most clearly seen by aid of diagrams of the same kind as those used in IV. III. A tenant's-share curve would be drawn standing one-half (or one-third or two-thirds) as high above OD as AC does; the area below that curve would represent the tenant's share, that above the landlord's. OH being, as before, the return required to remunerate the tenant for one dose; he will, if left to his own devices, not carry cultivation beyond the point at which the tenant's-share curve cuts HC: and the landlord's will therefore be a less proportion of the returns to a slighter cultivation than under the English plan. Diagrams of this kind may be used to illustrate the way in which Ricardo's analysis of the causes that govern the Producer's Surplus from land, apply to systems of tenure other than the English. A little further change will adapt them to such customs as those found in Persia, where land itself is of small value; and "the harvest is divided into five parts, which are apportioned as follows, one part to each: 1, land; 2, water for irrigation, etc.; 3, seed; 4, labour; 5, bullocks. The landlord generally owns two, so he gets two-fifths of the harvest."

This is already done in America, and in many parts of France; and some good judges think that the practice may be extended largely, and infuse new life into what a little while ago was regarded as the decaying system of Metayage. If worked out thoroughly, it will result in the cultivation being carried just about as far and affording the landlord the same income as he would have on the English plan for equally fertile and well-situated land equipped with the same capital, and in a place in which the normal ability and enterprise of candidates for farms is the same.

Starting as in the last note, let the Circulating capital supplied by the landlord be represented by the distance OK marked off along OD. Then, if the landlord controls the amount OK freely and in his own interest, and can bargain with his tenant as to the amount of labour he applies, it can be proved geometrically that he will so adjust it as to force the tenant to cultivate the land just as intensively as he would under the English tenure; and his share will then be the same as under it. If he cannot modify the amount OK, but can still control the amount of the tenant's labour, then with certain shapes of the produce curve, the cultivation will be more intensive than it would be on the English plan; but the landlord's share will be somewhat less. This paradoxical result has some scientific interest, but little practical importance.

The term "peasant proprietor" is a very vague one: it includes many who by thrifty marriages have collected into one hand the results of several generations of hard work and patient saving; and in France some of these were able to lend freely to the Government after the great war with Germany. But the savings of the ordinary peasant are on a very small scale; and in three cases out of four his land is starved for want of capital: he may have a little money hoarded or invested, but no good grounds have been shown for believing that he often has much.

It would seem that England gets more produce per acre of fertile land than even the Netherlands, though there is some doubt about it. The Netherlands have led the way for England in more paths of industrial enterprise than any other country has; and this enterprise has diffused itself from their thickly scattered towns over the whole land. But there is error in the common opinion that they support as dense a population as England does, and yet export on the balance a great deal of agricultural produce. For Belgium imports a great part of her food; and even Holland imports as much food as she exports, though her non-agricultural population is small. In France, farm crops and even potatoes are on the average only about half as heavy as in England proper; and France has only about half the weight of cattle and sheep in proportion to her area. On the other hand, the small cultivators of France excel in poultry and fruit and other light branches of production for which her superb climate is well suited.

For long periods the landlord may be regarded as an active partner and the predominant partner in the business: for short periods his place is rather that of the sleeping partner. On the part played by his enterprise compare the Duke of Argyll's Unseen Foundations of Society, especially p. 374.

There is still (1907) considerable difference of opinion as to the extent to which the habits of the landlords combined with the existing system of tenure hinder the formation of new small holdings, which might provide an intelligent labourer with an opportunity for starting an independent business of his own, as easily as the artisan can start a retail shop and repairing business in metal or other goods.

The difficulty is even greater in small holdings. For the capitalist farmer does at all events measure the prime cost in terms of money. But the cultivator working with his own hands often puts into his land as much work as he feels able to do, without estimating carefully its money value in relation to its product.

See VI. II. 5, and the references given there.

Prothero's English Farming, ch. VI. gives some instances of prolonged resistance to changes, and adds that an Act had to be passed in England as late as 1634 "agaynst plowynge by the taile."

See IV. III. 5, 6.

Horse-power is dearer relatively to both steam-power and hand-power in England than in most other countries. England has taken the lead in the improvement of field steam machinery. The cheapness of horse-power tells generally on the side of moderate sized farms versus very small ones; but the cheapness of steam-power and "motor" power obtained from petrol, etc., tells on the side of very large farms, except in so far as the use of field steam machinery can be hired economically and at convenient times.

The experiment of working farms on a very large scale is difficult and expensive, because it requires farm buildings and means of communication specially adapted to it; and it may have to overcome a good deal of resistance from custom and sentiment not altogether of an unhealthy kind. The risk also would be great; for in such cases those who pioneer often fail, though their route when well trodden may be found to be the easiest and best.

The interpretation of this term varies with local conditions and individual wants. On permanent pasture near a town or an industrial district the advantages of small holdings are perhaps at their maximum, and the disadvantages at their minimum. For small arable holdings the land should not be light, but strong, and the richer the better; and this is especially the case with holdings so small as to make much use of the spade. The small cultivator can often pay his rent most easily where the land is hilly and broken, because there he loses but little from his want of command of machinery.

They increase the number of people who are working in the open air with their heads and their hands: they give to the agricultural labourer a stepping-stone upwards, prevent him from being compelled to leave agriculture to find some scope for his ambition, and thus check the great evil of the continued flow of the ablest and bravest farm lads to the towns. They break the monotony of existence, they give a healthy change from indoor life, they offer scope for variety of character and for the play of fancy and imagination in the arrangement of individual life; they afford a counter attraction to the grosser and baser pleasures; they often enable a family to hold together that would otherwise have to separate; under favourable conditions they improve considerably the material condition of the worker; and they diminish the fretting as well as the positive loss caused by the inevitable interruptions of their ordinary work.

The evidence before the Committee on small holdings, 1906 [Cd 3278] discusses very fully the advantages and disadvantages of ownership for small holders; with apparently a balance of opinion against ownership.

The Ricardian theory of rent ought not to bear the greater part of the blame that has been commonly thrown on it, for those mistakes which English legislators made during the first half of this century in trying to force the English system of land tenure on India and Ireland. The theory concerns itself with the causes that determine the amount of the Producer's surplus from land at any time; and no great harm was done when this surplus was regarded as the landlord's share, in a treatise written for the use of Englishmen in England. It was an error in jurisprudence and not in economics that caused our legislators to offer to the Bengal tax-collector and Irish landlord facilities for taking to themselves the whole property of a cultivating firm, which consisted of tenant and landlord in the case of Ireland, and in the case of Bengal, of the Government and tenants of various grades; for the tax-collector was in most cases not a true member of the firm, but only one of its servants. But wiser and juster notions are prevailing now in the Government of India as well as of Ireland.

Compare Tooke and Newmarch, History of Prices, Vol. VI. App. III.

Difficulties of this kind are practically solved by compromises which experience has justified, and which are in accordance with the scientific interpretation of the term "normal." If a local tenant showed extraordinary ability, the landlord would be thought grasping who, by threatening to import a stranger, tried to extort a higher rent than the normal local farmer could make the land pay. On the other hand, a farm being once vacant, the landlord would be thought to act reasonably if he imported a stranger who would set a good model to the district, and who shared about equally with the landlord the extra net surplus due to his ability and skill, which, though not strictly speaking exceptional, were yet above the local standard. Compare the action of Settlement Officers in India with regard to equally good land cultivated by energetic and unenergetic races, noticed in the footnote on p. 642.

Compare Nicholson, Tenants' Gain not Landlords' Loss, ch. X.

The Agricultural Holdings Act of 1883 enforced customs which Mr. Pusey's committee eulogized, but did not propose to enforce. Many improvements are made partly at the expense of the landlord and partly at that of the tenant, the former supplying the materials, and the latter the labour. In other cases it is best that the landlord should be the real undertaker of the improvements, bearing the whole expense and risk, and realizing the whole gain. The Act of 1900 recognized this; and, partly for the sake of simplicity in working, it provided that compensation for some improvements can be claimed only if they have been made with the consent of the landlord. In the case of drainage notice of the tenant's wishes must be served on the landlord; so that he may have the opportunity of himself undertaking the risks and reaping a share of the accruing benefits. In reference to manuring, and some kinds of repairs, etc., the tenant may act without consulting the landlord, merely taking the risk that his outlay will not be regarded by the arbitrator as calling for compensation.

This matter is further discussed in Appendix G.

Comp. IV. V. VI. and VII. and XII.; and VI. IV. V. and VII.

Compare V. III. 3; and VI. VII. 2.

Compare IV. VI. 7; and VI. V. 2.

Compare V. II. 3, and VI. IV. 6, and VIII. 7-9.

Suppose, for instance, that an increase in the supply of work of the group by one-tenth forced them into work in which their marginal uses were lower, and thus lowered by a thirtieth their wages for any given amount of work; then, if the change came from an increase in their numbers, their average wages would fall by a thirtieth. But if it came from an increase in their efficiency, their wages would rise by about a sixteenth. (More exactly they would be 11/10 × 29/30 = 1 19/300 of what they were before.)

As regards the relation between wages and the marginal net product of labour see VI. I. and II. and especially pp. 516-7 and 537-540: the matter is further discussed in VI. XIII. especially p. 706 n. As regards the need to seek a truly representative margin see V. VIII. 4, 5: where it is argued (p. 409 n.) that when that has been reached, the influence of the supply of any group of workers on the wages of others has already been reckoned: and that the influence which any one individual worker exerts on the general economic environment of the industries of a country is infinitesimal, and is not relevant to an estimate of his net product in relation to his wages. In V. XII. and Appendix H something is said of the hindrances to a rapid increase of output even where such an increase would theoretically yield great economies; and of the special care needed in the use of the term "margin" in regard to them.

Suppose for instance that an amount of capital, c, co-operating with an amount of labour, l, had raised a product 4p; of which p goes as interest to capital, and the remaining 3p to labour. (The labour is of many grades, including management, but it is all referred to a common standard in a day's unskilled labour of given efficiency: see above IV. III. 8.) Suppose that the quantity of labour has doubled, and that of capital has quadrupled: while the absolute efficiency in production of any given amount of each of the agents has not changed. Then we may expect 4c in co-operation with 2l to produce 2 × 3p + 4p = 10p. Now suppose the rate of interest, i.e. the reward for any quantum of capital (exclusive that is of the work of management etc.) to have fallen to two-thirds of its original amount; so that 4c receives only 8/3p instead of 4p as interest; then there will be left for labour of all kinds 7 1/3p instead of 6p. The amount, that goes to each quantum of capital, will have decreased; and that which goes to each quantum of labour, will have increased. But the aggregate amount that goes to capital will have increased in the ratio of 8:3; while that which goes to labour will have increased in the lower ratio of 22:9.

We took account of them when arriving at the conclusion that the tendency to increasing return would on the whole countervail that to diminishing return: and we ought to count them in at their full value when tracing the changes in real wages. Many historians have compared wages at different epochs with exclusive reference to those things which have always been in common consumption. But from the nature of the case, these are just the things to which the law of diminishing return applies, and which tend to become scarce as population increases, and the view thus got is therefore one-sided and misleading in its general effect.

The evils of the past were however greater than is commonly supposed. See e.g. the striking evidence of the late Lord Shaftesbury and of Miss Octavia Hill upon the Commission on Housing of 1885. London air is full of smoke; but it is probably less unwholesome than it was before the days of scientific sanitation, even though the population was then relatively small.

Primitive appliances will bring water from high ground to a few public fountains: but the omnipresent water supply which both in its coming and its going performs essential services for cleanliness and sanitation, would be impossible without coal-driven steam-pumps and coal-made iron pipes.

See Appendix A, especially § 6.

Mr W. Sturge (in an instructive paper read before the Institute of Surveyors, Dec. 1872) estimates that the agricultural (money) rent of England doubled between 1795 and 1815, and then fell by a third till 1822; after that time it has been alternately rising and falling; and it is now about 45 or 50 millions as against 50 or 55 millions about the year 1873, when it was at its highest. It was about 30 millions in 1810, 16 millions in 1770, and 6 millions in 1600. (Compare Giffen's Growth of Capital, ch. V., and Porter's Progress of the Nation, Sect. II. ch. I.) But the rental of urban land in England is now much greater than the rent of agricultural land: and in order to estimate the full gain of the landlords from the expansion of population and general progress, we must reckon in the values of the land on which there are now railroads, mines, docks, etc. Taken all together, the money rental of England's soil is more than twice as high, and its real rental is perhaps four times as high, as it was when the corn laws were repealed.

Of course there are exceptions. Economic progress may take the form of building new railways that will draw off much of the traffic of some of those already existing, or of increasing the size of ships till they can no longer enter docks the entrance to which is through shallow waters.

See IV. VII.

See above VI. VI. 7.

Comp. IV. VI. 1, 2; and IX. 6. As the trade progresses, improvements in machinery are sure to lighten the strain of accomplishing any given task; and therefore to lower task wages rapidly. But meanwhile the pace of the machinery, and the quantity of it put under the charge of each worker, may be increased so much that the total strain involved in the day's work is greater than before. On this subject employers and employed frequently differ. It is for instance certain that time wages have risen in the textile trades; but the employees aver, in contradiction to the employers, that the strain imposed on them has increased more than in proportion. In this controversy wages have been estimated in money; but when account is taken of the increase in the purchasing power of money, there is no doubt that real efficiency wages have risen; that is, the exertion of a given amount of strength, skill and energy is rewarded by a greater command over commodities than formerly.

This may be made clearer by an example. If there are 500 men in grade A earning 12s. a week, 400 in grade B earning 25s. and 100 in grade C earning 40s., the average wages of the 1000 men are 20s. If after a time 300 from grade A have passed on to grade B, and 300 from grade B to grade C, the wages in each grade remaining stationary, then the average wages of the whole thousand men will be about 28s. 6d. And even if the rate of wages in each grade had meanwhile fallen 10 per cent., the average wages of all would still be about 25s. 6d., that is, would have risen more than 25 per cent. Neglect of such facts as these, as Sir R. Giffen has pointed out, is apt to cause great errors.

The above brief remarks on the evolution of wages may well be supplemented by Prof. Schmoller's survey in his Volkswirtschaftslehre, III. 7 (Vol. II. pp. 259-316). It is specially notable for its breadth of view, and its careful coordination of the material and psychical elements of progress. See also the latter half of his second Book.

It should be noticed however that some of these gains may be traced to those opportunities for the formation of trade combinations engineered by a few able, wealthy and daring men to exploit for their own benefit a great body of manufactures, or the trade and traffic of a large district. That part of this power, which depends on political conditions, and especially on the Protective tariff, may pass away. But the area of America is so large, and its condition so changeful, that the slow and steady-going management of a great joint-stock company on the English plan is at a disadvantage in competition with the vigorous and original scheming, the rapid and resolute force of a small group of wealthy capitalists, who are willing and able to apply their own resources in great undertakings to a much greater extent than is the case in England. The ever-shifting conditions of business life in America enable natural selection to bring to the front the best minds for the purpose from their vast population, almost every one of whom, as he enters on life, resolves to be rich before he dies. The modern developments of business and of business fortunes are of exceptional interest and instruction to Englishmen: but their lessons will be misread unless the essentially different conditions of business life in the old world and the new are constantly borne in mind.

An instance, which came under the present writer's observation, may be mentioned here. In Palermo there is a semi-feudal connection between the artisans and their patrons. Each carpenter or tailor has one or more large houses to which he looks for employment; and so long as he behaves himself fairly well, he is practically secure from competition. There are no great waves of depression of trade; the newspapers are never filled with accounts of the sufferings of those out of work, because their condition changes very little from time to time. But a larger percentage of artisans are out of employment at the best of times in Palermo, than in England in the centre of the worst depression of recent years. Something further is said as to inconstancy of employment below, VI. XIII. 10.

See VI. II. 2, 3; also IV. IV. and V.; and VI. IV.

See IV. V. 4.

The facts are much in question, partly because they vary much from one industry to another; and those who have the most intimate knowledge of them, are apt to be biassed. When piece-work can be brought under collective bargaining by trade unions, the first effect of an improvement in plant is to raise real wages: and the onus of claiming a readjustment of piece rates in order to keep wages in just proportion to those which are being earned by equally difficult and responsible work in other occupations, is thus thrown upon the employers. In such cases, piece-work is generally in favour with employees. And where their organization is good, as in some classes of mining work, they approve it even in regard to work that is not uniform. But in many other cases it arouses their suspicion of unfair advantage. See below, § 8. According to Prof. Schmoller, it is estimated that piece-work increases output by 20 to 100 per cent. according to the race of the workers and the character and technique of the industry, Volkswirtschaftslehre, § 208. An instructive detailed statement of the causes which lead workers generally to oppose payment by results in certain industries, while welcoming it in others, is given by Cole, The payment of wages, ch. II.

The history of British industries offers the most various, the most clearly defined, and the most generally instructive experiments as to the influence of variations in the hours of labour on output: but international studies on the subject seem to be specially German. See for instance Bernard, Höhere Arbeitsintensität bei Kurzeren Arbeitszeit, 1909.

On the whole of this subject see Prof. Chapman's address at the British Association, 1909, published in the Economic Journal, vol. XIX.

See above, V. VI. 2.

To take an illustration, let us suppose that shoemakers and hatters are in the same grade, working equal hours, and receiving equal wages, before and after a general reduction in the hours of labour. Then both before and after the change, the hatter could buy, with a month's wages, as many shoes as were the net product of the shoemaker's work for a month (see VI. II. 7). If the shoemaker worked less hours than before, and in consequence did less work, the net product of his labour for a month would have diminished, unless either by a system of working double shifts the employer and his capital had earned profits on two sets of workers, or his profits could be cut down by the full amount of the diminution in output. The last supposition is inconsistent with what we know of the causes which govern the supply of capital and business power. And therefore the hatter's wages would go less far than before in buying shoes; and so all round for other trades.

For instance, when we look at the history of the introduction of the eight hours' day in Australia we find great fluctuations in the prosperity of the mines and the supply of gold, in the prosperity of the sheep farms and the price of wool, in the borrowing from old countries capital with which to employ Australian labour to build railways, etc., in immigration, and in commercial credit. And all these have been such powerful causes of change in the condition of the Australian working man as to completely overlay and hide from view the effects of a reduction of the hours of labour from 10 gross (8¾ net after deducting meal times) to 8 net. Money wages in Australia are much lower than they were before the hours were shortened; and, though it may be true that the purchasing power of money has increased, so that real wages have not fallen, yet there seems no doubt that the real wages of labour in Australia are not nearly as much above those in England as they were before the reduction in the hours of labour: and it has not been proved that they are not lower than they would have been if that change had not taken place. The commercial troubles through which Australia passed shortly after the change were no doubt mainly caused by a series of droughts supervening on a reckless inflation of credit. But a contributory cause appears to have been an over-sanguine estimate of the economic efficiency of short hours of labour, which led to a premature reduction of hours in industries not well adapted for it.

A short provisional description of trade unions is affixed to Vol. I. of my Elements of Economics, which is, in other respects, an abridgment of the present volume. And the account of their aims and methods given in the Final Report of the Labour Commission, 1893, has the unique authority derived from the cooperation of employers and trade union leaders of exceptional ability and experience.

Compare above, VI. III. 7 and V. 2.

The wholesome influences on social wellbeing, which are exercised by trade union leaders in many directions, are apt to be marred by a misunderstanding on this matter. They commonly give as their authority the very weighty and able treatise on Industrial Democracy by Mr and Mrs Webb, where the misunderstanding is suggested. Thus they say, p. 710, "It is now theoretically demonstrated, as we saw in our chapter on 'The Verdict of the Economists,' that under 'perfect competition,' and complete mobility between one occupation and another, the common level of wages tends to be no more than 'the net produce due to the labour of the marginal labourer' who is on the verge of not being employed at all!" And, p. 787 f. n., they refer to this marginal labourer as an industrial invalid or pauper, saying:—"If the wages of every class of labour under perfect competition tend to be no more than the net produce due to the additional labour of the marginal labourer of that class, who is on the verge of not being employed at all, the abstraction of the paupers, not necessarily from productive labour for themselves, but from the competitive labour market, by raising the capacity of the marginal wage labourer, would seem to increase the wages of the entire labouring class."

It is really an understatement to say that competition tends to make the employer willing to pay twice as high wages to A as to B under these conditions. For an efficient worker who will make the same factory space and plant and supervision serve for twice as much production as an inefficient worker, is worth more than twice as much wages to the employer: he may really be worth three times as much. (See above, VI. III. 2.) Of course the employer may be afraid to offer to the more efficient worker wages proportionate to his true net product, lest inefficient workers, supported by their unions, should over-estimate his rate of profits, and claim a rise in wages. But in this case the cause which makes the employer pay attention to the net product of the less efficient worker, when considering how much it is worth his while to offer to the more efficient, is not free competition, but that resistance to free competition which is offered by the misapplication of the common rule. Some modern schemes for "gain sharing" aim at raising the wages of efficient workers nearly in proportion to their true net product; that is, more than in proportion to the "piece-work" rate: but trade unions do not always favour such schemes.

A useful history of the opposition to machinery is given in Industrial Democracy, Part II. chapter VIII. It is combined with the advice not generally to resist the introduction of machinery, but not to accept lower wages for working on the old methods in order to meet its competition. This is good advice for young men. But it cannot always be followed by men who have reached their prime: and if the administrative power of Governments should increase faster than the new tasks which they appropriate from private enterprise, they may do excellent service by grappling with those social discords that arise, when the skill of middle-aged and elderly men is rendered almost valueless by improved methods.

It may be noted that the great Amalgamated Society of Engineers, to which reference has just been made, led the way to concerted action between kindred branches of industry that softens the hard outlines of delimitation.

The quotation from Mill and the two paragraphs which follow it are reproduced from The Economics of Industry, III. I. 4, published by my wife and myself in 1879. They indicate the attitude which most of those, who follow in the traditions of the classical economists, hold as to the relations between consumption and production. It is true that in times of depression the disorganization of consumption is a contributory cause to the continuance of the disorganization of credit and of production. But a remedy is not to be got by a study of consumption, as has been alleged by some hasty writers. No doubt there is good work to be done by a study of the influence of arbitrary changes in fashion on employment. But the main study needed is that of the organization of production and of credit. And, though economists have not yet succeeded in bringing that study to a successful issue, the cause of their failure lies in the profound obscurity and ever-changing form of the problem; it does not lie in any indifference on their part to its supreme importance. Economics from beginning to end is a study of the mutual adjustments of consumption and production: when the one is under discussion, the other is never out of mind.

Some years ago the annual income of some 49,000,000 people in the United Kingdom appeared to amount to more than £2,000,000,000. Many leading artisans were earning about £200 a year; and there were a vast number of artisan households in which each of four or five members were earning an income ranging from 18s. to 40s. a week. The expenditure of these households was on as large, if not a larger scale, than would be possible if the total income were divided out equally, so as to yield about £40 annually a head. PS, 1920. No recent statistics are accessible on the matter. But it seems certain that the incomes of the working classes generally are increasing at least as fast as those of other classes. Several of the suggestions made in the present chapter are further developed in an article on "The social possibilities of economic chivalry" in the Economic Journal for March 1907.

A beginning might be made with a broader, more educative and more generous administration of public aid to the helpless. The difficulty of discrimination would need to be faced: and in facing it local and central authorities would obtain much of the information needed for guiding, and in extreme cases for controlling, those who are weak and especially those whose weakness is a source of grave danger to the coming generation. Elderly people might be helped with a chief regard to economy and to their personal inclinations. But the case of those, who are responsible for young children, would call for a greater expenditure of public funds, and a more strict subordination of personal freedom to public necessity. The most urgent among the first steps towards causing the Residuum to cease from the land, is to insist on regular school attendance in decent clothing, and with bodies clean and fairly well fed. In case of failure the parents should be warned and advised: as a last resource the homes might be closed or regulated with some limitation of the freedom of the parents. The expense would be great: but there is no other so urgent need for bold expenditure. It would remove the great canker that infects the whole body of the nation: and when the work was done the resources that had been absorbed by it would be free for some more pleasant but less pressing social duty.

This last consideration seems to have been pushed on one side largely under the influence of a faulty analysis of the nature of "parasitic" work and of its influence on wages. The family is, in the main, a single unit as regards geographical migration: and therefore the wages of men are relatively high, and those of women and children low where heavy iron or other industries preponderate, while in some other districts less than half the money income of the family is earned by the father, and men's wages are relatively low. This natural adjustment is socially beneficial; and rigid national rules as to minimum wages for men and for women, which ignore or oppose it, are to be deprecated.

See above, III. VI. 6; and Note VIII. in the Mathematical Appendix. Compare also Professor Carver on "Machinery and the Laborers" in the Quarterly Journal of Economics, 1908.

It is urged below, Appendix G, 8, 9, that the health of the working classes, and especially of their children, has a first claim on rates levied on that special value of urban land which is caused by the concentration of population.

See VI. V. 1, 2.

On the general question of the influence of physical surroundings on race character, both directly and indirectly, by determining the nature of the dominant occupations, see Knies, Politische Œkonomie, Hegel's Philosophy of History, and Buckle's History of Civilization. Compare also Aristotle's Politics, and Montesquieu's Esprit des Lois.

Montesquieu says quaintly (Bk. XIV. ch. II.) that the superiority of strength caused by a cold climate produces among other effects "a greater sense of superiority—that is, less desire of revenge; and a greater opinion of security—that is, more frankness, less suspicion, policy, and cunning." These virtues are eminently helpful to economic progress.

This may have to be modified a little, but only a little, if F. Galton should prove to be right in thinking that small numbers of a ruling race in a hot country, as for instance the English in India, will be able to sustain their constitutional vigour unimpaired for many generations by a liberal use of artificial ice, or of the cooling effects of the forcible expansion of compressed air. See his Presidential Address to the Anthropological Institute in 1887.

Comp. Bagehot's Physics and Politics, also the writings of Herbert Spencer and Maine.

Thus the "moderate level" at which custom fixes the price of a ploughshare will be found when analysed to mean that which gives the smith in the long run about an equal remuneration (account being taken of all his privileges and perquisites) with that of his neighbours who do equally difficult work; or in other words, that which under the régime of free enterprise, of easy communications and effective competition, we should call a normal rate of pay. If a change of circumstances makes the pay of smiths, including all indirect allowances, either less or more than this, there almost always sets in a change in the substance of the custom, often almost unrecognized and generally without any change in form, which will bring it back to this level.

The Teutonic Mark system is indeed now known to have been much less general than some historians had supposed. But where it was fully developed one small part, the home mark, was set aside permanently for living on, and each family retained its share in that for ever. The second part or arable mark was divided into three large fields, in each of which each family had generally several scattered acre strips. Two of these were cultivated every year, and one left fallow. The third and largest part was used as grazing land by the whole village in common; as was also the fallow field in the arable mark. In some cases the arable mark was from time to time abandoned to pasture, and land to make a new arable mark was cut out of the common mark, and this involved a redistribution. Thus the treatment of its land by every family affected for good or ill all the members of the village.

Compare the Duke of Argyll's account of Runrig cultivation in Unseen Foundations of Society, ch. IX.

Compare Neumann and Partsch, Physikalische Geographie von Griechenland, ch. I., and Grote's History of Greece, Part II. ch. I.

See above, p. 4. Thus even Plato says:—"Nature has made neither boot-makers nor blacksmiths; such occupations degrade the people engaged in them, miserable mercenaries excluded by their very position from political rights." (Laws, XII.) And Aristotle continues:—"In the state which is best governed the citizens ... must not lead the life of mechanics or tradesmen, for such a life is ignoble and inimical to virtue." (Politics, VII. 9; see also III. 5.) These passages give the key-note of Greek thought with regard to business. But as there were few independent fortunes in ancient Greece, many of her best thinkers were compelled to take some share in business.

This fundamental opposition between the Greek and Roman tempers was made clear by Hegel in his Philosophy of History. "Of the Greeks in the first genuine form of their freedom we may assert that they had no conscience; the habit of living for their country without further analysis or reflection was the principle dominant among them ... Subjectivity plunged the Greek world into ruin"; and the harmonious poetry of the Greeks made way for "the prose life of the Romans," which was full of subjectivity, and "a hard dry contemplation of certain voluntary aims." A generous, though discriminating, tribute to the services which Hegel indirectly rendered to Historical Economics is given by Roscher, Gesch. der Nat. Œk. in Deutschland, § 188. Compare also the chapters on Religion in Mommsen's History, which seem to have been much influenced by Hegel; also Kautz, Entwickelung der National-Œkonomie, Bk. I.

See above, ch. I. § 2. The misunderstanding is in some measure attributable to the influence of the generally acute and well-balanced Roscher. He took a special delight in pointing out analogies between ancient and modern problems; and though he also pointed out differences, yet the general influence of his writings tended to mislead. (His position is well criticized by Knies, Politische Œkonomie vom geschichtlichen Standpunkte: especially p. 391 of the second edition.)

Friedländer, Sittengeschichte Roms, p. 225. Mommsen goes so far as to say (History, Book IV. ch. XI.):—"Of trades and manufactures there is nothing to be said, except that the Italian nation in this respect persevered in an inactivity bordering on barbarism.... The only brilliant side of Roman private economics was money dealing and commerce." Many passages in Cairnes' Slave Power read like modern versions of Mommsen's History. Even in the towns the lot of the poor free Roman resembled that of the "mean white" of the Southern Slave States. Latifundia perdidere Italiam; but they were farms like those of the Southern States, not of England. The weakness of free labour at Rome is shown in Liebenam's Geschichte des römischen Vereinswesens.

One aspect of this is described by Schmoller in his short but excellent account of the Trading Companies of Antiquity. After showing how trading groups of which all the members belong to one family may thrive even among primitive peoples, he argues (Jahrbuch für Gesetzgebung, XVI. pp. 740-2) that no form of business association of the modern type could flourish long in such conditions as those of ancient Rome unless it had some exceptional privileges or advantages as the Societates Publicanorum had. The reason why we moderns succeed in bringing and keeping many people "under the same hat" to work together, which Antiquity failed in doing, "is to be sought exclusively in the higher level of intellectual and moral strength, and the greater possibility now than then of binding together men's egoistic commercial energies by the bonds of social sympathy." See also Deloume, Les Manieurs d'Argent à Rome; an article on State control of Industry in the fourth century by W. A. Brown in the Political Science Quarterly, Vol. II.; Blanqui's History of Political Economy, chs. V. and VI.; and Ingram's History, ch. II.

Hegel (Philosophy of History, Part IV.) goes to the root of the matter when he speaks of their energy, their free spirit, their absolute self-determination (Eigensinn), their heartiness (Gemüth), and adds, "Fidelity is their second watchword, as Freedom is the first."

A brilliant eulogy of their work is given by Draper, Intellectual Development of Europe, ch. XIII.

What is true of the great free towns, that were practically autonomous, is true in a less degree of the so-called free boroughs of England. Their constitutions were even more various than the origins of their liberties; but it now seems probable that they were generally more democratic and less oligarchic than was at one time supposed. See especially Gross, The Gild Merchant, ch. VII.

But treachery was common in Italian cities, and was not very rare in northern castles. People compassed the death of their acquaintances by assassination and poison: the host was often expected to taste the food and drink which he offered to his guest. As a painter rightly fills his canvas with the noblest faces he can find, and keeps as much in the background as possible what is ignoble, so the popular historian may be justified in exciting the emulation of the young by historical pictures in which the lives of noble men and women stand out in bold relief, while a veil is drawn over much of the surrounding depravity. But when we want to take stock of the world's progress, we must reckon the evil of past times as it really was. To be more than just to our ancestors is to be less than just to the best hopes of our race.

We are perhaps apt to lay too much stress on the condemnation by the Church of "usury" and some kinds of trade. There was then very little scope for lending capital to be used in business, and when there was, the prohibition could be evaded by many devices, some of which were indeed sanctioned by the Church itself. Though St Chrysostom said that "he who procures an article to make profit by disposing of it entire and unaltered, is ejected from the temple of God"; yet the Church encouraged merchants to buy and sell goods unaltered at fairs and elsewhere. The authority of Church and State and the prejudices of the people combined to put difficulties in the way of those who bought up large quantities of goods in order to sell them retail at a profit. But though much of the business of these people was legitimate trade, some of it was certainly analogous to the "rings" and "corners" in modern produce markets. Compare the excellent chapter on the Canonist Doctrine in Ashley's History and the notice of it by Hewins in the Economic Review, Vol. IV.

Indirectly it aided progress by promoting the Crusades; of which Ingram well says (History, ch. II.) that they "produced a powerful economic effect by transferring in many cases the possessions of the feudal chiefs to the industrial classes, whilst by bringing different nations and races into contact, by enlarging the horizon and widening the conceptions of the populations, as well as by affording a special stimulus to navigation, they tended to give a new activity to international trade."

For the purposes of statistical comparison the well-to-do yeoman must be ranked with the middle classes of to-day, not with the artisans. For those who were better off than he were very few in number; while the great mass of the people were far below him; and were worse off in almost every respect than they are now.

Rogers says that in the thirteenth century the value of arable land was only a third of the capital required to work it; and he believes that so long as the owner of the land was in the habit of cultivating it himself, the eldest son often used various devices for alienating a part of his land to his younger brothers in exchange for some of their capital. Six Centuries of Work and Wages, pp. 51, 2.

This parallelism is further developed in Book VI.; see especially ch. IX. § 5.

The Reformation "was the affirmation ... of Individuality.... Individuality is not the sum of life, but it is an essential part of life in every region of our nature and our work, in our work for the part and for the whole. It is true, though it is not the whole truth, that we must live and die alone, alone with God." Westcott's Social Aspects of Christianity, p. 121. Comp. also Hegel's Philosophy of History, Part IV. section iii. ch. 2.

The licentiousness of some forms of art created in serious but narrow minds a prejudice against all art; and in revenge socialists now rail at the Reformation as having injured both the social and the artistic instincts of man. But it may be questioned whether the intensity of the feelings which were engendered by the Reformation has not enriched art more than their austerity has injured it. They have developed a literature and a music of their own; and if they have led man to think slightingly of the beauty of the works of his own hands, they have certainly increased his power of appreciating the beauties of nature. It is no accident that landscape painting owes most to lands in which the Reformed religion has prevailed.

Smiles has shown that the debt which England owes to these immigrants is greater than historians have supposed, though they have always rated it highly.

This term, which has the authority of Adam Smith and is habitually used on the Continent, seems to be the best to indicate those who take the risks and the management of business as their share in the work of organized industry.

In the latter half of the eighteenth century, especially, the improvements in agriculture moved very fast. Implements of all kinds were improved, draining was carried out on scientific principles, the breeding of farm animals was revolutionized by Bakewell's genius; turnips, clover, rye-grass, etc. came into general use, and enabled the plan of refreshing land by letting it lie fallow to be superseded by that of "alternating husbandry." These and other changes constantly increased the capital required for the cultivation of land; while the growth of fortunes made in trade increased the number of those who were able and willing to purchase their way into country society by buying large properties. And thus in every way the modern commercial spirit spread in agriculture.

The quarter of a century beginning with 1760 saw improvements follow one another in manufacture even more rapidly than in agriculture. During that period the transport of heavy goods was cheapened by Brindley's canals, the production of power by Watt's steam-engine, and that of iron by Cort's processes of puddling and rolling, and by Roebuck's method of smelting it by coal in lieu of the charcoal that had now become scarce; Hargreaves, Crompton, Arkwright, Cartwright and others invented, or at least made economically serviceable, the spinning-jenny, the mule, the carding machine, and the power-loom; Wedgwood gave a great impetus to the pottery trade that was already growing rapidly; and there were important inventions in printing from cylinders, in bleaching by chemical agents, and in other processes. A cotton factory was for the first time driven directly by steam power in 1785, the last year of the period. The beginning of the nineteenth century saw steam-ships and steam printing-presses, and the use of gas for lighting towns. Railway locomotion, telegraphy and photography came a little later. See for further details a brilliant chapter by Professor Clapham in the Cambridge Modern History, Vol. X.

See Held's Sociale Geschichte Englands, Bk. II. ch. III.

The tendency of industries to flee away from places where they were overregulated by the gilds was of old standing, and had shown itself in the thirteenth century, though it was then comparatively feeble. See Gross' Gild Merchant, Vol. I. pp. 43 and 52.

In times of peace no one ventures openly to rank money as of high importance in comparison with human lives; but in the crisis of an expensive war money can always be used so as to save them. A general who at a critical time sacrifices lives in order to protect material, the loss of which would cause the loss of many men, is held to have acted rightly, though no one would openly defend a sacrifice of soldiers' lives in order to save a few army stores in time of peace.

List worked out with much suggestiveness the notion that a backward nation must learn its lessons not from the contemporary conduct of more forward nations, but from their conduct when they were in the same state in which it is now. But, as Knies well shows (Politische Œkonomie, II. 5), the growth of trade and the improvement of the means of communication are making the developments of different nations tend to synchronize.

See I. I. 5.

Meanwhile "Cameralistic" studies were developing the scientific analysis of public business, at first on the financial side alone; but from 1750 onwards increasingly in regard to the material, as distinguished from the human, conditions of the wealth of nations.

Cantillon's essay Sur la Nature de Commerce, written in 1755, and covering a wide range, has indeed some claims to be called systematic. It is acute and in some respects ahead of his time; though it now appears that he had been anticipated on several important points by Nicholas Barbon, who wrote sixty years earlier. Kautz was the first to recognize the importance of Cantillon's work; and Jevons declared he was the true founder of Political Economy. For a well-balanced estimate of his place in economics, see an article by Higgs in the Quarterly Journal of Economics, Vol. VI.

In the two preceding centuries writers on economic questions had continually appealed to Nature; each disputant claiming that his scheme was more natural than that of others, and the philosophers of the eighteenth century, some of whom exercised a great influence on economics, were wont to find the standard of right in conformity to Nature. In particular Locke anticipated much of the work of the French economists in the general tone of his appeals to Nature, and in some important details of his theory. But Quesnay, and the other French economists who worked with him, were drawn to the pursuit of natural laws of social life by several forces in addition to those which were at work in England.

Even the generous Vauban (writing in 1717) had to apologize for his interest in the wellbeing of the people, arguing that to enrich them was the only way to enrich the king—Pauvres paysans, pauvre Royaume, pauvre Royaume, pauvre Roi. On the other hand Locke, who exercised a great influence over Adam Smith, anticipated the ardent philanthropy of the Physiocrats as he did also some of their peculiar economic opinions. Their favourite phrase Laissez faire, laissez aller, is commonly misapplied now. Laissez faire means that anyone should be allowed to make what things he likes, and as he likes; that all trades should be open to everybody; that Government should not, as the Colbertists insisted, prescribe to manufacturers the fashions of their cloth. Laissez aller (or passer) means that persons and goods should be allowed to travel freely from one place to another, and especially from one district of France to another, without being subject to tolls and taxes and vexatious regulations. It may be noticed that laissez aller was the signal used in the Middle Ages by the Marshals to slip the leash from the combatants at a tournament.

Compare the short but weighty statement of Adam Smith's claims to supremacy in Wagner's Grundlegung, Ed. 3, pp. 6, etc.; also Hasbach's Untersuchungen über Adam Smith (in which the notice of the influence of Dutch thought on both English and French is of special interest); and L. L. Price's Adam Smith and his relations to Recent Economics in the Economic Journal, Vol. III. Cunningham, History, § 306, argues forcibly that "his great achievement lay in isolating the conception of national wealth, while previous writers had treated it in conscious subordination to national power"; but perhaps each half of this contrast is drawn with too sharp outlines. Cannan in his Introduction to the Lectures of Adam Smith, shows the importance of Hutcheson's influence on him.

For instance, he had not quite got rid of the confusion prevalent in his time between the laws of economic science and the ethical precept of conformity to nature. "Natural" with him sometimes means that which the existing forces actually produce or tend to produce, sometimes that which his own human nature makes him wish that they should produce. In the same way, he sometimes regards it as the province of the economist to expound a science, and at others to set forth a part of the art of government. But loose as his language often is, we find on closer study that he himself knows pretty well what he is about. When he is seeking for causal laws, that is, for laws of nature in the modern use of the term, he uses scientific methods; and when he utters practical precepts he generally knows that he is only expressing his own views of what ought to be, even when he seems to claim the authority of nature for them.

The popular use of this term in Germany implies not only that Adam Smith thought that the free play of individual interests would do more for the public weal than Government interference could, but further that it almost always acted in the ideally best way. But the leading German economists are well aware that he steadily insisted on the frequent opposition that there is between private interests and the public good: and the old use of the term Smithianismus is becoming discredited. See for instance a long list of such conflicts quoted from the Wealth of Nations by Knies, Politische Œkonomie, ch. III. § 3. See also Feilbogen, Smith und Turgot, and Zeyss, Smith und der Eigennutz.

The relations of Value to Cost of Production had been indicated by the Physiocrats and by many earlier writers, among whom may be mentioned Harris, Cantillon, Locke, Barbon, Petty; and even Hobbes who hinted, though vaguely, that plenty depends on labour and abstinence applied by man to working up and accumulating the gifts of nature by land and by sea—proventus terrœ et aquœ, labor et parsimonia.

Adam Smith saw clearly that while economic science must be based on a study of facts, the facts are so complex, that they generally can teach nothing directly; they must be interpreted by careful reasoning and analysis. And as Hume said, the Wealth of Nations "is so much illustrated with curious facts that it must take the public attention." This is exactly what Adam Smith did: he did not very often prove a conclusion by detailed induction. The data of his proofs were chiefly facts that were within everyone's knowledge, facts physical, mental and moral. But he illustrated his proofs by curious and instructive facts; he thus gave them life and force, and made his readers feel that they were dealing with problems of the real world, and not with abstraction; and his book, though not well arranged, is a model of method. The supremacy of Adam Smith and of Ricardo, each in his own way, is well set forth by Prof. Nicholson in The Cambridge Modern History, Vol. X. ch. XXIV.

Another way in which he influenced the young economists around him was through his passionate desire for security. He was indeed an ardent reformer. He was an enemy of all artificial distinctions between different classes of men; he declared with emphasis that any one man's happiness was as important as any other's, and that the aim of all action should be to increase the sum total of happiness; he admitted that other things being equal this sum total would be the greater, the more equally wealth was distributed. Nevertheless so full was his mind of the terror of the French revolution, and so great were the evils which he attributed to the smallest attack on security that, daring analyst as he was, he felt himself and he fostered in his disciples an almost superstitious reverence for the existing institutions of private property.

He is often spoken of as a representative Englishman: but this is just what he was not. His strong constructive originality is the mark of the highest genius in all nations. But his aversion to inductions and his delight in abstract reasonings are due, not to his English education, but, as Bagehot points out, to his Semitic origin. Nearly every branch of the Semitic race has had some special genius for dealing with abstractions, and several of them have had a bias towards the abstract calculations connected with the trade of money dealing, and its modern developments; and Ricardo's power of threading his way without slip through intricate paths to new and unexpected results has never been surpassed. But it is difficult even for an Englishman to follow his track; and his foreign critics have, as a rule, failed to detect the real drift and purpose of his work. For he never explains himself: he never shows what his purpose is in working first on one hypothesis and then on another, nor how by properly combining the results of his different hypothesis it is possible to cover a great variety of practical questions. He wrote originally not for publication, but to clear away the doubts of himself, and perhaps a few friends, on points of special difficulty. They, like himself, were men of affairs with a vast knowledge of the facts of life: and this is one cause of his preferring broad principles, consonant with general experience, to particular inductions from select groups of facts. But his knowledge was one-sided: he understood the merchant, but not the working man. His sympathies however were with the working man; and he supported his friend Hume in the defence of the right of the working men to combine for mutual aid in the same way as their employers were able to do. Compare Appendix I below.

As regards wages there were even some logical errors in the conclusions they deduced from their own premisses. These errors when traced back to their origin are little more than careless modes of expression. But they were seized upon eagerly by those who cared little for the scientific study of economics, and cared only to quote its doctrines for the purpose of keeping the working classes in their place; and perhaps no other great school of thinkers has ever suffered so much from the way in which its "parasites" (to use a term that is commonly applied to them in Germany), professing to simplify economic doctrines, really enunciated them without the conditions required to make them true. Miss Martineau gave some colour to these statements by her vehement writings against the Factory Acts: and Senior also wrote on the same side. But Miss Martineau was not an economist in the proper sense of the word: she confessed that she never read more than one chapter of an economic book at a time before writing a story to illustrate economic principles, for fear the pressure on her mind should be too great: and before her death she expressed a just doubt whether the principles of economics (as understood by her) had any validity. Senior wrote against the Acts when he had only just begun to study economics: a few years later he formally recanted his opinions. It has sometimes been said that McCulloch was an opponent of the Acts; but in fact he heartily supported them. Tooke was the chief of the sub-Commissioners, whose report on the employment of women and children in the mines roused public opinion to decisive action against it.

A partial exception must be made for Malthus, whose studies of population were suggested by Godwin's essay. But he did not properly belong to the Ricardian school and he was not a man of business. Half a century later Bastiat, a lucid writer but not a profound thinker, maintained the extravagant doctrine that the natural organization of society under the influence of competition is the best not only that can be practically effected, but even that can be theoretically conceived.

James Mill had educated his son in the straitest tenets of Bentham and Ricardo, and had implanted in his mind a zeal for clearness and definiteness. And in 1830 John Mill wrote an essay on economic method in which he proposed to give increased sharpness of outline to the abstractions of the science. He faced Ricardo's tacit assumption that no motive of action except the desire for wealth need be much considered by the economist; he held that it was dangerous so long as it was not distinctly stated, but no longer; and he half promised a treatise which should be deliberately and openly based on it. But he did not redeem the promise. A change had come over his tone of thought and of feeling before he published in 1848 his great economic work. He called it Principles of Political Economy, with some of their Applications to Social Philosophy [it is significant that he did not say to other branches of Social Philosophy; comp. Ingram's History, p. 154], and he made in it no attempt to mark off by a rigid line those reasonings which assume that man's sole motive is the pursuit of wealth from those which do not. The change in his attitude was a part of the great changes that were going on in the world around him, though he was not fully aware of their influence on himself.

It has already been observed that List overlooked the tendency of modern inter-communication to make the development of different nations synchronize. His patriotic fervour perverted in many ways his scientific judgment: but Germans listened eagerly to his argument that every country had to go through the same stages of development that England had gone through, and that she had protected her manufacturers when she was in transition from the agricultural to the manufacturing stage. He had a genuine desire for truth; his method was in harmony with the comparative method of inquiry which is being pursued with vigour by all classes of students in Germany, but especially by her historians and lawyers; and the direct and indirect influence of his thought has been very great. His Outlines of a New System of Political Economy appeared in Philadelphia in 1827, and his Das nationale System der Politischen Œkonomie in 1840. It is a disputed point whether Carey owed much to List; see Miss Hirst's Life of List, ch. IV. As to the general relations between their doctrines, see Knies, Pol. Œk., 2nd edition, pp. 440, etc.

The excellence of this work may perhaps partly be attributed to the union of legal and economic studies in the avenues to many careers in Germany as in other countries of the Continent. A splendid instance is to be found in Wagner's contributions to economics.

In such matters, the English, the Germans, the Austrians, and indeed every nation claim for themselves more than others are willing to allow them. This is partly because each nation has its own intellectual virtues, and misses them in the writings of foreigners; while it does not quite understand the complaints which others make as to its shortcomings. But the chief reason is that, since a new idea is generally of gradual growth, and is often worked out by more than one nation at the same time, each of those nations is likely to claim it; and thus each is apt to under-estimate the originality of the others.

See I. II.

Mill, On Comte, p. 82. Comte's attack on Mill illustrates the general rule that in discussions on method and scope, a man is nearly sure to be right when affirming the usefulness of his own procedure, and wrong when denying that of others. The present movement towards Sociology in America, England and other countries recognizes the need for the intensive study of economics and other branches of social science. But perhaps the use of the term Sociology is premature. For it seems to claim that a unification of social sciences is already in sight: and though some excellent intensive studies have been published under the name of Sociology, it is doubtful whether those efforts at unification which have been made so far have achieved any great success beyond that of preparing the way and erecting danger posts at its pitfalls for the guidance of later generations, whose resources will be less inadequate for the giant task than our own.

Mill exaggerated the extent to which this can be done; and he was thereby led to make excessive claims for the deductive methods in economics. See the last of his Essays; Book VI. of his Logic, and especially its ninth chapter; also pp. 157-161 of his Autobiography. His practice, like that of many other writers on economic method of all shades of opinion, was less extreme than his profession.

Compare Mill, Logic, Book VI. ch. III.

Ashley, On the Study of Economic History.

As the imitators of Michael Angelo copied only his faults, so Carlyle, Ruskin and Morris find to-day ready imitators, who lack their fine inspirations and intuitions.

See I. III.

See above, p. 82.

See above, footnote on p. 52.

Knies defined capital as the existing stock of goods "which is ready to be applied to the satisfaction of demand in the future." And Prof. Nicholson says:—"The line of thought suggested by Adam Smith and developed by Knies is found to lead to this result: Capital is wealth set aside for the satisfaction—directly or indirectly—of future needs." But the whole phrase, and especially the words "set aside," seem to lack definiteness, and to evade rather than overcome the difficulties of the problem.

The following are among the chief definitions of capital by Adam Smith's English followers:—Ricardo said:—"Capital is that part of the wealth of a country which is employed in production and consists of food, clothing, tools, raw materials, machinery, etc. necessary to give effect to labour." Malthus said:—"Capital is that portion of the stock of a country which is kept or employed with a view to profit in the production and distribution of wealth." Senior said:—"Capital is an article of wealth, the result of human exertion, employed in the production or distribution of wealth." John Stuart Mill said:—"What capital does for production, is to afford the shelter, protection, tools and materials which the work requires, and to feed and otherwise maintain the labourers during the process. Whatever things are destined for this use are capital." We shall have to return to this conception of capital in connection with the so-called Wages Fund doctrine; see Appendix J.

For an argument to this effect, and an excellent discussion of the difficulties of the whole subject, see Wagner, Grundlegung, Ed. 3, pp. 315-6.

See II. IV. 1, 5. The connection of the productiveness of capital with the demand for it, and of its prospectiveness with the supply of it has long been latent in men's minds; though it has been much overlaid by other considerations, many of which appear now to be based on misconceptions. Some writers have laid more stress on the supply side and others on the demand side: but the difference between them has often been little more than a difference of emphasis. Those who have laid stress on the productivity of capital, have not been ignorant of man's unwillingness to save and sacrifice the present for the future. And on the other hand, those who have given their thought mainly to the nature and extent of the sacrifice involved in this postponement, have regarded as obvious such facts as that a store of the implements of production gives mankind a largely increased power of satisfying their wants. In short there is no reason to believe that the accounts which Prof. Böhm-Bawerk has given of the "naive productivity theories," the "use theories" etc. of capital and interest would have been accepted by the older writers themselves as well-balanced and complete presentations of their several positions. Nor does he seem to have succeeded in finding a definition that is clear and consistent. He says that "Social capital is a group of products destined to serve towards further production; or briefly a group of Intermediate products." He formally excludes (Book I. ch. VI.) "dwelling houses and other kinds of buildings such as serve immediately for any purpose of enjoyment or education or culture." To be consistent, he must exclude hotels, tramways, passenger ships and trains, etc.; and perhaps even plant for supplying the electric light for private dwellings; but that would seem to deprive the notion of capital of all practical interest. There seems no good ground for excluding the public theatre while including the tramcar, which would not justify the inclusion of mills engaged in making home-spun and the exclusion of those engaged in making lace. In answer to this objection he urges, with perfect reason, that every economic classification must allow for the existence of border lines between any two classes, to contain things which belong in part to each of the two. But the objections submitted to his definition are that its border lines are too broad relatively to the area which they inclose; that it conflicts violently with the uses of the market-place; and that yet it does not embody, as the French definition does, a perfectly consistent and coherent abstract idea.

See p. 336.

See pp. 453 and 659.

Above V. IX. 1. This Appendix is largely based on the Memorandum there mentioned.

Final Report of Royal Commission on Local Taxation, 1901, p. 12.

A good deal of evidence on these points was taken by the Commission just named (p. 794, n. 3).

See above, V. XI. 3 and 8. The builder generally looks to sell his lease before much of it has run out. But the price which he expects to get is the (discounted) excess of the rental value of the property over the ground rent for the remaining years: and therefore the substance of his calculations is nearly the same as it would be if he intended to keep the property in his own hands.

This assumes that the land is assessed to the tax at the same amount, whatever the use to which it is put. The case of an extra tax for a special use can be treated as in V. X. 6. If agricultural land were exempt from the tax, then the tenant of a house or factory in the country would escape that part of the site tax which is assessed on the excess of the value of the land for building uses over its value for agriculture. This might slightly increase concentration in towns, and thus take a little from the burden on site owners in them: but it would not materially affect the values of sites in the centre of towns. See also below § 6.

For instance suppose an area of a million square feet to be covered with rows of parallel buildings 40 feet high and 40 feet deep; a bylaw, that the sky must subtend half a right angle at the ground looking straight back as well as front, will cause the distance between each row and the next to be 40 feet: and the aggregate volume of building will be 40 feet multiplied into half the total area, i.e. 20,000,000 cubic feet. Now suppose the height of the buildings to be trebled. Under the same bylaw, the distances between the rows must be 120 feet: and, on the supposition that it is not convenient to increase the depth of the houses beyond 40 feet the aggregate volume of building will be 120 feet multiplied into a quarter of the total area, that is, 30,000,000 cubic feet. Thus the total accommodation will be increased by only one half; instead of being trebled, as would have been the case if the old distances of 40 feet between the rows had been maintained.

See VI. X. 10.

See above, p. 437.

See I. IV. 2-4.

In old times the windows of a house were taken as representative of the house, and were taxed heavily: but the tax did not strike, and was not intended to strike, persons as owners and users of windows only; it was intended to strike them, and did strike them, as owners and users of houses. And, just as the window is a more or less good representative of the house; so the house is a representative, perhaps a better representative, of a certain scale and style of household expenditure in general; and when houses are taxed, the tax is, and is intended to be, a tax upon the ownership and use of the means of living in certain general conditions of comfort and social position. If part of the tax assessed on houses were removed, and the deficit made up by taxes assessed on furniture and indoor servants, the true incidence of the taxes would be nearly the same as now.

The recent Commission on Local Taxation was much occupied with the difficulty of assessing site values; and with the even greater difficulty of making ad interim arrangements by which an equitable share (whether more or less) of the rates, which were designed in the long run to be paid by the ultimate landowners, might be transferred from the occupiers to lessees. (See especially pp. 153-176 of the Final Report.) The difficulty of assessment, though undoubtedly very great, is of a kind to be diminished rapidly by experience: the first thousand such assessments might probably give more trouble, and yet be less accurately made than the next twenty thousand.

See p. 461.

See V. XII. 1.

Besides positions of stable equilibrium, there are theoretically at least positions of unstable equilibrium: they are the dividing boundaries between two positions of stable equilibria, the watersheds, so to speak, dividing two river basins, and the price tends to flow away from them in either direction.

Thus in fig. 38 the curves intersect several times and the arrow heads on Ox show the directions in which, according to its situation, R tends to move along Ox. This shows that if R is at H or at L and is displaced slightly in either direction, it will, as soon as the disturbing cause is over, return to the equilibrium position from which it was displaced: but that if it is at K and is displaced towards the right, it will continue, even after the cessation of the disturbing cause, to move to the right till it reaches L, and if displaced towards the left it will continue to move to the left till it reaches H. That is to say, H and L are points of stable equilibrium and K is a point of unstable equilibrium. We are thus brought to the result that:—

The equilibrium of demand and supply corresponding to the point of intersection of the demand and supply curves is stable or unstable according as the demand curve lies above or below the supply curve just to the left of that point; or, which is the same thing, according as it lies below or above the supply curve just to the right of that point.

We have seen that the demand curve is inclined throughout negatively. From this it follows that, if just to the right of any point of intersection the supply curve lies above the demand curve; then, if we move along the supply curve to the right, we must necessarily keep above the demand curve till the next point of intersection is reached: that is to say, the point of equilibrium next on the right-hand side of a point of stable equilibrium, must be a point of unstable equilibrium; and, it may be proved in like manner, that so must the adjacent point of intersection on the left-hand side. In other words, in cases in which the curves cut each other more than once, points of stable and unstable equilibrium alternate.

Also the last point of intersection reached, as we move to the right, must be a point of stable equilibrium. For if the amount produced were increased indefinitely, the price at which it could be sold would necessarily fall almost to zero; but the price required to cover the expense of producing it would not so fall. Therefore, if the supply curve be produced sufficiently far towards the right, it must at last lie above the demand curve.

The first point of intersection arrived at as we proceed from left to right may be a point either of stable or of unstable equilibrium. If it be a point of unstable equilibrium, this fact will indicate that the production of the commodity in question on a small scale will not remunerate the producers; so that its production cannot be commenced at all unless some passing accident has caused temporarily an urgent demand for the commodity, or has temporarily lowered the expenses of producing it; or unless some enterprising firm is prepared to sink much capital in overcoming the initial difficulties of the production, and bringing out the commodity at a price which will ensure large sales.

See V. III. 6.

See III. IV. 6.

That is, for any backward movement of the amount offered for sale, the left end of the demand curve would probably need to be raised in order to make it represent the new conditions of demand.

For instance, the shape of the supply curve in fig. 38, implies that if the ware in question were produced on the scale OV annually, the economies introduced into its production would be so extensive as to enable it to be sold at a price TV. If these economies were once effected the shape of the curve SS' would probably cease to represent accurately the circumstances of supply. The expenses of production, for instance, of an amount OU would no longer be much greater proportionately than those of an amount OV. Thus in order that the curve might again represent the circumstances of supply it would be necessary to draw it lower down, as the dotted curve in the figure. Professor Bullock, Quarterly Journal of Economics, Aug. 1902, p. 508, argues that this dotted curve should not slope upward from T however gently: but should slope downward, to indicate that the diminished production will lower marginal cost, "by forcing out of business the weakest producers," so that the marginal cost will in future be that of more competent producers than before. This result is possible. But it must be remembered that the marginal cost of the weakest producer does not govern value, but only indicates the force of the causes which govern it. In so far as the economies of production on a large scale are "internal," i.e. belonging to the internal organization of individual firms, the weaker firms must speedily be driven out of existence by the stronger. The continued existence of weaker firms is an evidence that a strong firm cannot indefinitely increase its output; partly because of the difficulty of extending its market, and partly because the strength of a firm is not permanent. The strong firm of to-day was probably weak, because young, some time back; and will be weak, because old, some time hence. With a smaller output there will still be weak firms at the margin; and they will probably in the course of time be weaker than if the scale of total production had been maintained. Also the external economies will be less. In other words the representative firm will probably be smaller, weaker, and with less access to external economies. See Prof. Flux in the same Journal for Feb. 1904.

That is, when at a good distance to the right of the equilibrium point, the supply curve is but little above the demand curve.

One difficulty arises from the fact that a suitable time to allow for the introduction of the economies appertaining to one increase in the scale of production is not long enough for another and larger increase, so we must fix on some fairly long time ahead, which is likely to be indicated by the special problem in hand, and adjust the whole series of supply prices to it.

See above V. III. 6; V. 4; and IX. 6.

In the adjoining diagram, SS' is not a true supply curve adapted to the conditions of the world in which we live; but it has properties, which are often erroneously attributed to such a curve. We will call it the particular expenses curve. As usual the amount of a commodity is measured along Ox, and its price along Oy. OH is the amount of the commodity produced annually, AH is the equilibrium price of a unit of it. The producer of the OHth unit is supposed to have no differential advantages; but the producer of the OMth unit has differential advantages which enable him to produce with an outlay PM, a unit which it would have cost him an outlay AH to produce without those advantages. The locus of P is our particular expenses curve; and it is such that any point P being taken on it, and PM being drawn perpendicular to Ox, PM represents the particular expenses of production incurred for the production of the OMth unit. The excess of AH over PM = QP, and is a producer's surplus or rent. For convenience the owners of differential advantages may be arranged in descending order from left to right; and thus SS' becomes a curve sloping upwards to the right.

Now the difference between the particular expenses curve and a normal supply curve lies in this, that in the former we do, and in the latter we do not, take the general economies of production as fixed and uniform throughout. The particular expenses curve is based throughout on the assumption that the aggregate production is OH, and that all the producers have access to the internal and external economies which belong to this scale of production; and, these assumptions being carefully borne in mind, the curve may be used to represent a particular phase of any industry, whether agricultural or manufacturing: but they cannot be taken to represent its general conditions of production.

That can be done only by the normal supply curve, in which PM represents the normal expenses of production of the OMth unit on the supposition that OM units (not any other amount, as OH) are being produced; and that the available economies of production external and internal are those which belong to a representative firm where the aggregate volume of production is OM. These economies will generally be less than if the aggregate volume of production were the larger quantity OH; and therefore, M being to the left of H, the ordinate at M for the supply curve will be greater than for a particular expenses curve drawn for an aggregate production OH.

It follows that the area SAF which represents aggregate rent in our present diagram would have represented something less than the aggregate rent, if SS' had been a normal supply curve even for agricultural produce (DD' being the normal demand curve). For even in agriculture the general economies of production increase with an increase in the aggregate scale of production.

If however we choose to ignore this fact for the sake of any particular argument; that is, if we choose to assume that MP being the expenses of production of that part of the produce which was raised under the most difficult circumstances (so as to pay no rent) when OM units were produced, it remains also the expenses of production (other than rent) of the OMth unit even when OH is produced; or, in other words, if we assume that the increase in production from the amount OM to the amount OH did not alter the expenses of production of the OMth unit, then we may regard SAF as representing the aggregate rent even when SS' is the normal supply curve. It may be occasionally convenient to do this, attention being of course called every time to the nature of the special assumption made.

But no assumption of the kind can be made with regard to the supply curve of a commodity that obeys the laws of increasing return. To do so would be a contradiction in terms. The fact that the production of the commodity obeys that law, implies that the general economies available when the aggregate volume of production is large, are so much greater than when it is small, as to override the increasing resistance that nature offers to an increased production of the raw materials of which the industry makes use. In the case of a particular expenses curve, MP will always be less than AH (M being to the left of H) whether the commodity obeys the law of increasing or diminishing return; but on the other hand in the case of a supply curve, for a commodity that obeys the law of increasing return, MP would generally be greater than AH.

It remains to say that if we are dealing with a problem in which some even of those appliances for production which were made by man, have to be taken as a given quantity for the time, so that their earnings will be of the nature of a quasi-rent; we may then draw a particular expenses curve, in which MP stands for the expenses of production in the narrower sense in which such quasi-rents are excluded; and the area SAF would thus represent the aggregate of rents proper and of these quasi-rents. This method of treating short-period normal value problems has attractions, and may perhaps ultimately be of service: but it requires careful handling, for the assumptions on which it rests are very slippery.

Appendix I

Compare the concluding remarks of Book V.: and Appendix B, 5.

See an admirable article on Ricardo's Use of Facts in the first volume of the Harvard Quarterly Journal of Economics, by the late Professor Dunbar.

Prof. Ashley in a suggestive criticism of this Note, as part of an attempted "Rehabilitation of Ricardo" (Economic Journal, Vol. I.), insists that it has been commonly believed that Ricardo did in fact habitually think of mere quantities of labour as constituting cost of production, and governing value, subject only to "slight modifications"; and that this interpretation of him is the most consistent with his writings as a whole. It is not disputed that this interpretation has been accepted by many able writers: otherwise there would have been little need for rehabilitating, i.e. clothing more fully his somewhat too naked doctrines. But the question whether Ricardo is to be supposed to have meant nothing by the first chapter of his book, merely because he did not constantly repeat the interpretation clauses contained in it, is one which each reader must decide for himself according to his temperament: it does not lend itself to be solved by argument. It is here claimed not that his doctrines contained a complete theory of value: but only that they were in the main true as far as they went. Rodbertus and Marx interpreted Ricardo's doctrine, to mean that interest does not enter into that cost of production which governs (or rather takes part in governing) value: and as regards this Prof. Ashley appears to concede all that is claimed here when (p. 480) he takes it as beyond question that Ricardo "regarded the payment of interest, that is, of something more than the mere replacement of capital, as a matter of course."

See V. III. 7.

See an article on Jevons' Theory by the present writer in the Academy for April 1, 1872. The edition of his Theory brought out by his son in 1911, contains an Appendix on his account of interest, with special reference to that article (see also above VI. I. 8). He contends that his father's theory is "true as far as it goes" though he "followed the unfortunate practice of the Ricardian school by abstracting for treatment certain ideas, and assuming that his readers are familiar with their relations and taking his point of view." The son may be accepted as the true interpreter of the father: and the debts of economics to the father are no doubt so great as to be comparable with its transcendent obligations to Ricardo. But Jevons' Theory had a combative side, as well as a constructive. In great part it was an attack on what he called in his Preface, "that able but wrong-headed man, David Ricardo" who "shunted the car of Economic science on to a wrong line." His criticisms on Ricardo achieved some apparently unfair dialectical triumphs, by assuming that Ricardo thought of value as governed by cost of production without reference to demand. This misconception of Ricardo was doing great harm in 1872: and it seemed necessary to show that Jevons' Theory of Interest, if interpreted as he interpreted Ricardo, is untenable.

See above, p. 544.

These three paragraphs are reproduced from a paper written for the Cooperative Annual, and reprinted in the Report of the Industrial Remuneration Conference, 1885, which contained the outlines of the central argument of the first two chapters of Book VI.

Unless indeed we reckon the security and other benefits which Government provides as separate items of the national income.

Considerable light has been thrown on the subject of the Wages-fund by Walker's writings, and the controversies connected with them. The instances which he has collected of employees rendering their services in advance of payment bear effectively on some turns of the controversy, but not on its main issue. Cannan's Production and Distribution, 1776-1848, contains much acute, if sometimes too severe, criticism of the earlier wage theories. A more conservative attitude is taken in Taussig's weighty Capital and Wages; to which the English reader may be specially referred for a fuller account and criticism of the German doctrines mentioned in the text.

See the Appendix to Book IV. of Newcomb's Political Economy.

At all events according to most definitions. There are some indeed who confine capital to "intermediate goods," and must therefore exclude hotels, and lodging-houses, and workmen's cottages, at all events as soon as they are used. But grave objections to the adoption of this definition have already been indicated in Appendix E, 4.

See above, p. 785. Again, an increased use of brass furniture that needs much cleaning, and generally of modes of living that require the assistance of many indoor and outdoor servants, operates on the demand for labour in the same way as the use of hand-made goods in place of goods made by expensive machinery and other fixed capital. It may be true that the employment of a great number of domestic servants is an ignoble and wasteful use of a large income: but there is no other equally selfish method of spending it which tends so directly to increase the share of the national dividend which goes to the working classes.

This point was emphasized by Gossen and Jevons. See also Clark's Surplus Gains of Labour.

See VI. V.

Compare VI. IX. 4.

Ch. II. Collected Works, p. 42. Comp. Cannan's Production and Distribution, 1776-1848, pp. 325-6. Ricardo's distinction between his two classes of improvements is not altogether happy, and need not be considered here.