CHAPTER I. PRELIMINARY SURVEY OF DISTRIBUTION AND EXCHANGE. CH. I. siocrats accordance circum their time try, that § 1. THE simplest account of the causes which deter- BOOK VI. mine the supply of labour and capital is that given by the French economists who just preceded Adam Smith, and it is The Phy based upon the peculiar circumstances of France in the latter assumed, in half of last century. The taxes, and other exactions levied with the from the French peasant, were then limited only by his peculiar ability to pay; and few of the labouring classes were far from stances of starvation. So the Economists or Physiocrats, as they were and councalled, assumed for the sake of simplicity, that there was a wages were natural law of population according to which the wages of lowest labour were kept at starvation limit'. They did not suppose pove that this was true of the whole working population, but the exceptions were so few, that they thought that the general impression given by their assumption was true: somewhat in the same way as it is well to begin an account of the shape of the earth, by saying that it is an oblate spheroid, although a few mountains do project as much as a thousandth part of its radius beyond the general level. at their possible level, much the Again, they knew that the rate of interest in Europe had and that fallen during the five preceding centuries, in consequence of same was the fact that "economy had in general prevailed over luxury." true of the But they were impressed very much by the sensitiveness of Capital. 1 Comp. Turgot, 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 gains nothing but his life (Il ne gagne que sa vie)." Turgot, ib. § LXXX. His position was, however, not altogether consistent, as is well shown by Prof. Böhm-Bawerk, Kapitalzinstheorien, Vol. 1. Ch. IV. interest on CH. I. BOOK VI. capital, and the quickness with which it evaded the oppressions of the tax-gatherer by retiring from his grasp; and they therefore concluded that there was no great violence in the supposition that if its profits were reduced below what they then were, capital would speedily be consumed or migrate. Accordingly they assumed, again for the sake of simplicity, that there was something like a natural, or necessary rate of profit, corresponding in some measure to the natural rate of wages; that if the current rate exceeded this necessary level, capital would grow rapidly, till it forced down the rate of profit to that level; and that, if the current rate went below that level, capital would shrink quickly, and the rate would be forced upwards again. These rigid assump- Wages and profits being thus fixed by natural laws, the natural value of everything was determined simply as the sum of wages and profits required to remunerate the producers1. Adam Smith worked out this conclusion more fully than the Physiocrats did; though it was left for Ricardo to make clear that the labour and capital needed for production must be estimated at the margin of cultivation, so as to avoid the element of rent. But Adam Smith saw also that labour and capital were not at the verge of starvation in England, as they were in France. In England the wages of a great part of the working classes were sufficient to allow much more than the mere necessaries of existence; and capital had too rich and safe a field of employment there to be likely to go out of existence, or to emigrate. So when he is carefully weighing his words, his use of the terms "the natural rate of wages," and "the natural rate of profit," has not that sharp 1 From these premisses 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 to "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. THE PHYSIOCRATS. ADAM SMITH. MALTHUS. 551 CH. I. definition and Axedness which it had in the mouths of the BOOK VI. Physiocrats; and he goes a good way towards explaining how they are determined by the ever-fluctuating conditions of demand and supply. He even insists that the liberal reward of labour "increases the industry of the common people"; that "a plentiful subsistence increases the bodily strength of the labourer; and the comfortable hope of bettering his condition, and of ending his days perhaps in ease and plenty, animates him to exert that strength to the utmost. Where wages are high, accordingly, we shall always find the workman more active, diligent and expeditious, than where they are low; in England, for example, than in Scotland; in the neighbourhood of great towns than in remote country places". And yet he sometimes fell back into the old way of speaking, and thus caused careless readers to suppose that he believed the mean level of the wages of labour to be fixed by an iron law at the bare necessaries of life. Malthus. Malthus again, in his admirable survey of the course of and by wages in England from the thirteenth to the eighteenth centuries, showed how their mean level oscillated from century to century, falling sometimes down to about half a peck of corn a day, and rising sometimes up to a peck and a half or even, in the fifteenth century, to about two pecks: a height beyond which they have never passed except in our own day. But although he observed that "an inferior mode of living may be a cause as well as a consequence of poverty," he traced this effect almost exclusively to the consequent increase of numbers; he did not anticipate the stress which economists of our own generation lay on the influence which habits of living exercise on the efficiency, and therefore on the earning power of the labourer. was more guage, Ricardo's language was even more unguarded than that Ricardo of Adam Smith and Malthus. It is true, indeed, that he said unguarded distinctly: It is not to be understood that the natural in his lanprice of labour estimated in food and necessaries is absolutely fixed and constant...It essentially depends on the habits and customs of the people." But, having said this once, he did Wealth of Nations, Bk. 1. Ch. vIII. 2 Political Economy, Ch. IV. § 2. 3 Principles, Ch. v. CH. I. is no for attri in the so-called "iron law BOOK VI. not take the trouble to repeat it constantly; and most of his readers forgot that he ever said it. In the course of his but there argument he frequently adopted a mode of speaking similar good cause to that of the Physiocrats; and seemed to imply that the buting to tendency of population to increase rapidly as soon as wages him a belief rise above the bare necessaries of life, causes wages to be fixed by "a natural law" to the level of these bare necessaries. of wages." This law has been called, especially in Germany, Ricardo's "iron" or "brazen" law: many German Socialists believe that this law is in operation now, and will continue to be so, as long as the plan on which production is organized remains capitalistic" or "individualistic"; and they claim Ricardo as an authority on their side: while many German economists, who are not Socialists, and who protest that no such law exists, yet maintain that the doctrines of Ricardo and his followers stand or fall with the truth of this law. In fact, however, Ricardo was not only aware that the necessary or natural limit of wages was fixed by no iron law, but is determined by the local conditions and habits of each place and time: he was further keenly sensitive to the importance of a higher "standard of living," and called on the friends of humanity to exert themselves to encourage the growth of a resolve among the working classes not to allow their wages to fall anywhere near the bare necessaries of life'. The persistency with which many writers continue to attribute to him a belief in the "iron law" can be accounted for only by his delight "in imagining strong cases," and his 1 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 superabundant 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." |