Chapter III: The Pessimists (2)

It has been said in criticism of the theory that the hierarchy of lands has simply been invented for the purpose of illustrating the theory. But what Ricardo has really done is to put in scientific language what every peasant knows—what has been handed down to him from father to son in unbroken succession, namely, that all land is not equally fertile.

Ricardo, so often represented as a purely abstract thinker, was in reality a very practical man and a close observer of those facts that were then occupying the attention of both public and Parliament. High rents, following upon high prices, constituted the most important phenomenon in the economic history of England towards the end of the eighteenth and the beginning of the nineteenth centuries. Right through the eighteenth century—that is, up to 1794—the highest price paid for corn was only a few pence above 60s. per quarter. But in 1796 the price rose to 92s., and in 1801 it reached 177s.—nearly three times the old price. The exceptionally high price, due to extraordinary causes, chief among them being the Napoleonic wars and the Continental blockade, could not last long, although the average during the years 1810-13 remained as high as 106s.[325]

This high price of corn was not entirely due to accidental causes. Something must be attributed to the fact that the available land was insufficient for the upkeep of the population, and that new land had to be cultivated irrespective of situation or degree of fertility. The pastures which had formerly covered England were daily disappearing before the plough. It was the period of the iniquitous Enclosure Acts, when landlords set their hearts upon enclosing the common lands. Professor Cannan has drawn up an interesting chart to show the close correspondence between the progress of the enclosure movement and the high price of corn.[326]

In 1813 a Commission appointed by the House of Commons to inquire into the price of corn—for the proprietors dreaded the day when the return of peace would allow of importation—came to the conclusion that new lands could not produce corn at a less cost than 80s. a quarter. What an argument for Ricardo’s theory![327]

But is there no possible means of avoiding the cultivation of lands of the second and third order? Intensive cultivation might doubtless do something to swell the returns on the older lands, but only up to a certain point. It would be absurd to imagine that on a limited area of land an unlimited quantity of subsistence can be produced. There must be a limit somewhere—an elastic limit perhaps, and one which the progress of science will push farther and farther away, even beyond our wildest hopes. But the cultivator stops long before this ideal limit is reached, for practice has taught him that the game is not worth the candle, because the outlay of capital and labour exceeds the profits on the return. This practical limit is determined for him by the law of diminishing returns.[328]

That law is indispensable to an understanding of the Ricardian theory, and is implied in Malthus’s theory of population. Its discovery is still earlier, and we have an admirable statement of it in Turgot’s writings: “It can never be imagined that a doubling of expenditure would result in doubling the product.” Malthus, unconsciously no doubt, repeated Turgot’s dictum.[329] It is evident, says he, that as cultivation extends, the annual addition made to the average product must continually diminish.[330] Ricardo witnessed the operation of the law under his very eyes, and he frequently hinted at the decreasing returns yielded by capital successively applied to the same land. Even in cases of that kind, where recourse to new lands was impossible, rents were bound to increase.

Taking again land No. 1, which yields corn at 10s. a bushel, let us imagine that there is an increased demand for wheat. Instead of breaking up land No. 2 an attempt might be made to increase the yield on No. 1, but nothing will be gained by it because the new bushel produced on No. 1 will cost 15s., which is just what it would cost if raised on second-class land. Furthermore, the price will now rise to 15s., and the two bushels will be disposed of for 30s., thus giving the proprietor a rent of 5s., because they have only cost 25s. to produce.[331]

There is still another possibility, however. Resort might be had to emigration and colonists might be encouraged to cultivate the best soils of distant lands, soils equal in fertility to those in the first class. The products of such lands would be got in exchange for the manufactured goods of the home country, to which the law of diminishing returns does not apply. But some account of the cost of transport, which increases the cost of production, must be taken, and this leads to the same result, namely, a rent for those nearest the market, because of the advantages of a superior situation. Distance and sterility, as J. B. Say remarks, are the same thing. If land in America yields corn at 10s. a bushel and freightage equals 5s., it is clear that corn imported into England must sell for 15s.—exactly the same condition of things as if land of the second order had been cultivated, and English landlords of the first class will still draw a rent of 5s. This third possibility was scarcely mentioned by Ricardo, and he could hardly have foreseen the wonderful developments in transportation that took place during the next fifty years, which resulted in a reversal of the law of diminishing returns and the confuting of the prophets.[332]

The great Ricardian theory, _prima facie_ self-evident, is in reality based upon a number of postulates to which we must pay more attention. Some of them must be regarded as economic axioms, but the validity of others is somewhat more doubtful.

In the first place there is the assumption that the produce of lands unequally fertile and representing unequal amounts of labour will always sell at the same price, or, in other words, will always possess the same exchange value. Is this proposition demonstrably sound? It is true when the product in question—for example, corn—is of uniform quality and kind. When the goods offered on the same market are so much alike that it is a matter of indifference to the buyer whether he takes the one or the other, then it is true that he will not pay a higher price for the one than he will for the other. This is what Jevons called the “law of indifference.”[333] In the second place it is implied that this exchange value, uniform for all identical products, is determined by the maximum amount of labour required for its production, or, in other words, by the amount of labour necessary for the production of the more costly portion.

This brings us to the Ricardian theory of value. We know that he considered that the value of everything was determined by the amount of labour necessary for its production.[334] Adam Smith had already declared that value was proportional to the amount of labour employed, but that this was the case only in primitive societies. “In civilised society, on the contrary, there is a still smaller number [of cases] in which it consists altogether in the wages of labour.” Labour was regarded by Smith as one of the factors determining value—though by no means the only one, land and capital being obviously the others.

But Ricardo simplified matters, as abstract thinkers frequently do, by neglecting the last-named factors. This leaves us only labour. Land is dismissed because rent contributes nothing to the creation of value, but is itself entirely dependent upon value.[335] Corn is not dear because land yields rent, but land yields rent because corn is dear. “The clearly understanding this principle is, I am persuaded, of the utmost importance to the science of political economy.” As for capital, why should we make a special factor of it, seeing that it is only labour? Its connotation might be extended so as to include “the labour bestowed not on their immediate production only, but on all those implements or machines required to give effect to the particular labour to which they were applied.”[336] But Ricardo was not thoroughly satisfied with this identification of capital and labour, and, great capitalist that he was, it must have caused him much searching of heart. Furthermore, it was not very easy to apply the conception to such commodities as timber and wine, which increase in value as they advance in age. In a letter to McCulloch he admits the weakness of his theory. After all the study that he had given to the matter, he had to confess that the relative value of commodities appeared to be determined by two causes: (1) the relative quantity of labour necessary for its production; (2) the relative length of time required to bring the commodity to market. He seems to have had a presentiment of the operation of a new and distinct factor, to which Böhm-Bawerk was to ascribe such importance.

The usual method of stating the Ricardian theory of value is to say that value is determined by cost of production. It is also the correct way, inasmuch as he stated it thus himself. It is, however, quite a different thing to say on the one hand that value is determined by labour and on the other that it depends upon the sum of wages and profits (supposing we omit rent).[337] On this point, as on several others, obscurity of thought alone saves Ricardo from the reproach of self-contradiction.

Suppose we proceed a step farther. The statement that value is determined by labour is not enough to account for the phenomenon of rent. Let us imagine a market where three sacks of corn are available for sale. Let us further suppose that the production of each involved a different quantity of labour, one being produced on land that was very fertile, the other on soil that was less generous, etc. Every sack will sell at the same price, but the question is, which of those different quantities of labour is the one that determines the price? Ricardo replies that it is the maximum quantity, and the value of the corn is determined by the value of that sack which is produced under the greatest disadvantages. But why should it not be determined by the value of the sack grown under the most favourable circumstances, or by the value of that other sack raised under conditions of average difficulty?

That is impossible. Let us imagine that the three sacks of corn came from three different kinds of land, A, B, and C, where the necessary quantities of labour were respectively 10, 15, and 20. It is inconceivable that the price should fall below 20, the cost of production of corn grown on C, for if it did C would no longer be cultivated; but the produce of C is _ex hypothesi_ indispensable. The market price cannot rise above 20, for in that case lands of the fourth class would be brought under cultivation, and their yield would be added to the quantity already on the market. The supposition is that the quantity of corn on the market is already sufficient to meet the demand, and the increase in supply would soon cause the price to fall again to the irreducible minimum of 20.

We cannot but admire the ingenuity of a demonstration that seeks to explain a phenomenon like rent—which is a revenue obtained independently of all labour—by the aid of a generalisation which regards labour as the one source of value. But the explanation is ingenious rather than convincing, for it is quite clear that only in the case of one of the sacks do value and amount of labour actually coincide. In the two other instances the quantity of labour and exchange value are absolutely and indefinitely divergent.

Most contemporary economists, while denying that value is solely the product of labour and preferring to regard it as a reflection of human preferences, would willingly recognise the element of truth contained in the Ricardian view. But it must be understood in the sense that competition, although tending to reduce price to the level of cost of production, cannot reduce it below the maximum cost of production, or the price necessary to repay the expenses of producing the most costly portion of the total amount demanded by the market.[338] In this sense it is true not only of agricultural but also of all other products, and it has a wider scope than was at first ascribed to it by its authors. Rent is nowadays recognised as an element which enters into all incomes. But with an extension of sway has gone attenuation, and the term has lost something of its original significance and precision. To-day rent is treated as the outcome of certain favourable conjunctures, which are to be found in all stations in life, and it is no uncommon thing to speak of consumer’s rent even.

The Ricardian theory, moreover, presupposed the existence of a class of land which yielded no rent, the returns which it gave being only just sufficient to cover cost of production. In other words, Ricardo only recognised the existence of differential rents, and dismissed the other cases mentioned by Malthus.

It really seems as if Malthus were in this instance more correct than Ricardo. It is quite possible that in the colonies, for example, there may be lands which yield no rent because of the superabundance of fertile land. Or the same thing may occur in an old country because of the extreme poverty of the land. But it is quite evident that in a society having a certain density of population the mere fact that there exists only a limited amount of land is enough to give to all lands and to their products a scarcity value independent of unequal returns. Nor would the case be materially different if all lands were supposed to be of equal fertility, for who would be willing to cultivate land which only yielded the bare equivalent of the expenses of production?

Ricardo’s unwillingness to recognise this other class of rent, which depends solely upon the limited quantity of land, was due to the fact that it would have contradicted his other theory that there is no value except labour. It is true that he made an exception of some rare “products,” such as valuable paintings, statuary, books, medals, first-class wines, etc., the quantity of which could not be increased by labour. Nobody would have taken any notice of such a slight omission as that, but had he left out such an important item of wealth as the earth itself there would be great danger of the whole theory crumbling to dust.[339]

* * * * *

Such is the theory of rent, celebrated above all economic doctrines, and concerning which it might be said that no doctrine, not even that of Malthus, has ever excited such impassioned criticism. For this there are several reasons.

In the first place, it led to an overthrow of the majesty of the “natural order” by simply depicting some of its gloomier aspects. Men had been led to believe that the “order” was for ever beyond challenge. Now, however, it seemed that if the new doctrine was true then the interests of the landed proprietors were opposed not only to those of every other class in the community—for sharing always begets antagonism—but also to the general interest of society as a whole.

For what are the real interests of proprietors? First, that population and its demands should increase as rapidly as possible in order that men may be forced to cultivate new lands, and that these new lands should be as sterile as possible, requiring much toil and thus causing an increase in rents. Exhaustive labour bestowed upon the cultivation of land that is gradually becoming poorer and poorer would soon make the fortune of every landlord.

As a class, proprietors have every interest in retarding the progress of agricultural science, a paradox which the slightest reflection will show to be true. Every advance in agricultural science must mean more products from the same amount of land and a check upon the law of diminishing returns, resulting in lower prices and reduced rents, since it would no longer be necessary to cultivate the poorer soils. In a word, since rent is measured by reference to the obstacles which thwart cultivation, just as the level of water in a pond is determined by the height of the sluice, everything that tends to lower this obstacle must reduce the rent. In mitigation of this charge it must, however, be noted that, taken individually, every proprietor is of necessity interested in agricultural improvement, because he may have an opportunity of benefiting by larger crops before the improvements have become general enough to lower prices and to push back the margin of cultivation. If every proprietor argued in this way, individual interest would finally cheat itself, to the advantage of the general public. But this is nothing to be very proud of.

Ricardo set out to demonstrate the antagonism,[340] and with what a vigorous pen does he not picture it! The study of this question of rent made of him a Free Trader stauncher than Adam Smith, more firmly convinced than the Physiocrats. Free Trade was for them founded upon the conception of a general harmony of interests, while Ricardo built his faith upon one clearly demonstrated fact—the high price of corn and its concomitant, high rents. Free Trade seemed to be the means of checking this disastrous movement. The free importation of corn implied the cultivation of distant lands as rich as or even richer than any in Britain. All this meant avoiding the cultivation of inferior lands and reducing the high price of corn.

He was also desirous of proving to the proprietors that the practice of free exchange, even though it might involve some loss of revenue to them, was really to their interest. Their opposition, he thought, was very short-sighted. “They fail to see,” he writes, “that commerce everywhere tends to increase production, and that as a result of this increased production general well-being is also improved, although there may be partial loss as the result of it. To be consistent with themselves they ought to try to arrest all improvement in agriculture and manufacture and all invention of machinery.”[341]

The theory of rent, in the second place, endangered the reputation of landowners by showing that their income is not the product of labour, and is consequently anti-social. No wonder that it has been so severely criticised by conservative economists. Ricardo himself, however, seemed quite unconscious of the nature of the blow thus aimed at the institution of private property. His indifference, which appears to us so surprising, is partly explained by the fact that the theory absolved the proprietor from all responsibility in the matter. Unlike profits and wages, rent does not figure in cost of production because it makes no contribution to the price of corn, but is itself wholly determined by that price.[342] The landed proprietor thus appears as the most innocent of the co-partners, playing a purely passive _rôle_. He does not produce rent, but simply accepts it.

That may be; but the fact that the proprietor plays no part in the production of rent, whilst exonerating him from complicity in its invidious consequences, spells ruin to his title of proprietor—that is, if we consider labour to be the only title to proprietorship. It was just this aspect of the question that drew the attention of Ricardo’s contemporary James Mill. Mill advocated the confiscation of rent or its socialisation by means of taxation.[343] He thus became a pioneer in the movement for land nationalisation, a cause that has since been championed by such writers as Colins, Gossen, Henry George, and Walras.

Finally, the theory of rent seems to give colour to certain theories which predict an extremely dark future for the race, corroborating the gloomy forebodings of Malthus. As society grows and advances it will be forced to employ lands that are less fertile and means of production that are more onerous. It seems as if the curse uttered in Genesis has been scientifically verified. “Thorns also and thistles shall it bring forth to thee; … in the sweat of thy face shalt thou eat bread.”

True, he did not carry his pessimism so far as to say that as the result of this fatal exhaustion of this most precious instrument of production the progress of mankind would for ever be arrested by the ravages of famine. Other beneficent forces, the progress of agricultural science and a larger employment of capital, would surmount the difficulty. “Although the lands that are actually being cultivated may be inferior to those which were in cultivation some years ago, and consequently production is becoming more difficult, can anyone doubt that the quantity of products does not greatly exceed that formerly produced?”

Ricardo’s theory does not involve a denial of progress. But it shows how the struggle is becoming more and more difficult, and how scarcity and want, if not actual famine, must lie in the path along which we are advancing. Suppose Great Britain were now to attempt to feed her 45 million inhabitants from her own soil, would there be much doubt as to the correctness of Ricardo’s prophecy?

It is an easy matter to reproach Ricardo[344] with his failure to foresee the remarkable development in the methods of transport and cheap importation which resulted in the arrest, if not the reversal, of the upward movement of the rent curve. The complaints of landlords both in England and Europe seem to belie the Ricardian theory.[345] But who can tell whether the peril is finally removed or not? The inevitable day will arrive when new countries will consume the corn which to-day they export. This may not come about in the history of England and Europe for some centuries yet, but when it does happen, rent, instead of being stationary and retrogressive, as it has been so long, will again resume its upward trend.

It is true that we may reckon upon the aid of agricultural science even if foreign importation should fail us. Ricardo was ever mindful of the great possibilities of human industry. Other economists, notably Carey and Fontenay, one of Bastiat’s disciples, have propounded a theory which is the exact antithesis of the Ricardian, namely, that human industry in its utilisation of natural forces always begins with the feeblest as being more easily tamed, the more powerful and recalcitrant forces only coming in for attention later on. The earth is no exception to the rule, and agricultural industry might well become not less but more productive.

This thesis, which implies a negation of the law of diminishing returns, is based upon a very debatable analogy.

When speaking of the future of industry it is well to remember that forces now seldom used, and perhaps seldom thought of, such as the energies liberated by chemical and intermolecular action, may hold infinite resources in reserve for mankind. But agriculture is different. Admitting that with nitrogen got from the atmosphere, or with phosphorus extracted from the subsoil, we may enrich the land indefinitely, still we are continually confronted with the limitations of time and space, which must determine the development of living things, and of agricultural products among them. When albumen can be scientifically produced then will the Ricardian theory become obsolete. Until then it holds the field.

2. OF WAGES AND PROFITS

Let us now approach these two laws of Malthus and Ricardo—the law of population and the law of rent—and ask what effect they are likely to have upon the condition of the worker and the amount of his wages. The answer is not very reassuring. On the one hand there is an indefinite increase in the numbers of the proletariat—the result of unchecked procreation, for “the moral restraint” can hardly be said to have influence at all. The inevitable result is the degradation of human labour. On the other hand, the law of diminishing returns causes a continuous rise in the price of necessaries. Between low wages on the one hand and high prices on the other, the worker feels himself crushed as between the hammer and the anvil.

Turgot had long since given utterance to the tragic thought that the wages of the worker are only just sufficient to keep him alive. His contemporary Necker gave expression to the view in terms still more melancholy. “Were it possible,” writes Necker, “to discover a kind of food less agreeable than bread but having double its sustenance, people would then be reduced to eating only once in two days.” These must be looked upon as mere isolated statements, sufficiently well attested by contemporary facts, perhaps, but laying no claim to be considered general, permanent, and inevitable laws such as Ricardo and Malthus would have regarded them.

And Ricardo still more emphatically declares that “the natural price of labour is that price which is necessary to enable the labourers one with another to subsist and to perpetuate their race without either increase or diminution.” Note the last words, “without increase or diminution”; that is, if a working man has more children than are necessary for replacing their parents, then their wages will fall below the normal rate until increased mortality shall have again established equilibrium.

This is not tantamount to saying that nominal wages measured in terms of money cannot increase. Indeed, it is absolutely necessary that they should increase, seeing that the price of commodities is continually rising. If they were to remain the same the workman would soon be reduced to starvation. Wages accordingly will show a tendency to rise in sympathy with the rising price of corn, so that the workman will always be able to procure just the same quantity of bread, no more and no less. It is his real wages measured in corn that remain stationary, and upon this depends the well-being of the working class.

But do they really remain stationary? Ricardo does not seem to think so. “In the natural advance of society the wages of labour will have a tendency to fall, as far as they are regulated by supply and demand; for the supply of labourers will continue to increase at the same rate, whilst the demand for them will increase at a slower rate.”[346]

It is even possible that an increase in nominal wages may hide a decrease in real wages. In that case, of course, wages will appear to rise, but “the fate of the labourer will be less happy; he will receive more money wages it is true, but his corn wages will be reduced.” Only when the working classes are sufficiently thoughtful to limit the number of their children will it be possible to hope for a preservation of the _status quo_. “It is a truth which admits not a doubt, that the comforts and well-being of the poor cannot be permanently secured without some regard on their part or some effort on the part of the legislature to regulate the increase of their numbers, and to render less frequent among them early and improvident marriages.”

In other words, there will always be a demand for a certain number of individuals in order to supply the needs of industry. So long as this indispensable minimum is not exceeded the wages even of the very lowest order must be sufficient to maintain existence, for they must all be kept alive at any rate. But should the working population exceed this demand nothing can prevent wages falling even below the minimum necessary for existence, for there will no longer be any necessity for keeping them all alive.

It must be remarked here that on this question, as on that of rent, Malthus is less pessimistic than Ricardo. Far from maintaining that every rise in wages of necessity involves an excess of population and a consequent lowering of wages, Malthus believed that a capacity for forethought, which constitutes the most efficacious check upon the operation of blind instinct, may be engendered even among the working classes, and that a high standard of life once secured may become permanent. All this may be very true, but the reasoning involves us in a vicious circle. In order that a high rate of wages may produce its beneficial effects it must first of all be established, but how can it possibly be established as long as the working classes remain steeped in the misery caused by not exercising this forethought?

An exit from the circle is only possible by recalling the fact that the market wage incessantly oscillates about the natural wage according to the exigencies of demand and supply. If this accidental rise could be prolonged a little it might become permanent and modify the workman’s standard of life.[347]

Such is the law of wages, which has long since passed into an axiom, and whose authority is invoked in every discussion on social reform. To every socialistic scheme, to every proposal for social reform, there is always one answer: “There is no means of improving the lot of the worker except by limiting the number of his children. His destiny is in his own hands.”[348] Latter-day socialism, commencing with Lassalle, makes a careful study of the law, and returns to the charge against the existing economic order by affirming that in no respect is it a natural law, but merely a result of the capitalist _régime_, upon which it supplies an eloquent commentary.

We must not fail to note that in the Ricardian theory there is not what we can exactly call antagonism between the landed proprietor and the proletarian. To the latter it is a matter of indifference whether rents be high or low, for his money wages move in sympathy with the price of corn, but his real wages never change. The proprietor on his side is equally indifferent to rising or falling wages, for they never affect his receipts. His rent, as a matter of fact, is determined by the quantity of labour employed on the least fertile lands, but this quantity of labour has nothing to do with the rate of wages. The landlords are the grandees of a different order.[349]

The real struggle lies between capitalist and worker. Once the value of corn has been determined by the cost of producing it on the least favoured land, the proprietor seizes whatever is over and above this, saying to both worker and capitalist, “You can divide the rest between you.” This clearly is Ricardo’s view.[350] “Whatever raises the wages of labour lowers the profits of stock.” Wages can only rise at the expense of profits, and _vice versa_—a terrible prophecy that has been abundantly illustrated by the fortunes of the labour movement, but never more clearly than at the present moment.

But the mere statement of the fatal antagonism between capitalist and workman must have caused both grief and surprise to those economists who had endeavoured to demonstrate the solidarity of interests between them as between brothers. Bastiat was one of these, and he tried to show that in the course of economic evolution the share of each factor tends to grow, but that labour’s shows the greatest increase.

There can be no objection to Ricardo’s method of stating the law. The whole thing is so evident that it is almost a truism. A cake is being shared between two persons. If one gets more than his due share is it not evident that the other must get less? It may be pointed out, on the other hand, that the amount available for distribution is continually on the increase, so that the share which each participant gets may really be growing bigger. But that is hardly the problem to be solved.[351] Increase the cake tenfold, even a hundredfold, but if one person gets more than half of it the other must have less. Ricardo’s implication is just that. His law deals with proportions and not with quantities.

Admitting that the proportion which one of the two factors receives can be increased only if the other is lessened, the problem is to discover which of the two, capital or labour, has the bigger portion. It really seems as if it were labour, for Ricardo speaks of another law of profits, namely, “the tendency of profits to a minimum.” Here is another thesis which has had a long career in the history of economics, but what are the reasons that can be adduced in support of it? The natural tendency of profits, then, is to fall; “for in the progress of society and wealth the additional quantity of food required is obtained by the sacrifice of more labour.” It is determined by the same cause as determined rent—the system is a solid piece of work at any rate.

But how does the cultivation of inferior land affect the rate of profits? We have already seen how the worker’s share, the minimum necessary for keeping body and soul together, goes to swell the high price of corn.[352] But the manufacturer cannot transfer the cost of high wages to the consumer, for the rate of wages has no effect on prices. (Labour has, but wages have none.) As a consequence, the capitalist’s share must be correspondingly reduced. We must remember that the workman gains nothing by the high rate of wages, for his consumption of food is limited by nature, but this does not hinder the capitalist losing a great deal by it.

And so there must come a time when the necessary wage will have absorbed everything and nothing will remain for profit. There will be a new era in history, for every incentive to accumulate capital will disappear with the extinction of profit. Capital will cease growing, no new lands will be cultivated, and population will be brought to a sudden standstill.[353] The stationary state with its melancholy vistas will be entered upon. Mill has described it in such eloquent terms that we are almost reconciled to the prospect. But it could hardly have been a pleasant matter for Ricardo, who was primarily a financier and had but little concern with philosophy. He was very much attached to his prophecies, and there is a delicate piece of irony in the thought that the tendency of profits towards a minimum should have been first noted by this great representative of capitalism. At the same time he felt a little reassured when he thought of the opposing forces which might check its downward trend and arrest the progress of rent. In both instances the best corrective seemed to lie in the freedom of foreign trade.

The general lines of distribution are presented to us in a strikingly simple fashion. The demonstration is neater even than the famous _Tableau économique_, and it has the further merit of being nearer the actual facts as they appeared in Ricardo’s day, for they are no longer quite the same. It may be represented by means of a diagram consisting of three lines.

At the top is an ascending line representing rent—the share of Mother Earth. The proprietor’s rent reveals a double increase both of money and kind, for as population and its needs grow it requires an increasing quantity of corn at an increased price. Still, the high price cannot be indefinitely prolonged, for beyond a certain point a high price of corn would arrest the growth of population and at the same time the growth of rent; then it would no longer be necessary to cultivate new lands.

In the middle is a horizontal line representing wages—labour’s share. The real wages of labour remain stationary, for it simply receives the quantity of corn necessary to keep it alive. It is true that as the corn is gradually becoming dearer the worker’s nominal wages increase, but with no real benefit to him.

Below this is a descending line representing profits—capital’s share.[354] It shows a downward trend for the simple reason that it finds itself squeezed between the proprietor’s share, which tends to increase, and the labourer’s, which is stationary. The capitalist is brought to our notice in the guise of an English farmer who is obliged to raise his servants’ wages as the corn becomes dearer, but who gains nothing by this rise because the extra revenue is taken by the proprietor in the form of higher rent. But profits cannot fall indefinitely, for beyond a certain point it would involve an end to the employment of old capital and the formation of new capital. This would hinder the cultivation of new lands, and would arrest the high price of corn and lower rent.

3. THE BALANCE OF TRADE THEORY AND THE QUANTITY THEORY OF MONEY

Such are the more characteristic of Ricardo’s doctrines—at any rate, those that left the deepest impression upon his successors and caused the greatest stir among his contemporaries. There are other doctrines besides which, regarded as contributions to the science, are much more important and more definite; but just because they figured almost directly in the category of universally accepted truths whose validity and authorship have never been questioned they have contributed less to his fame. Such are his theories of international trade and banking, where the theorist becomes linked to a first-rate practical genius. Here at any rate there is no note of pessimism and no suggestion of conflicting interests. On the contrary, he was able to point out that “under a system of perfectly free commerce the pursuit of individual advantage is admirably connected with the universal good of the whole.”

In the matter of international trade he showed himself a more resolute Free Trader than either Smith or the Physiocrats. It seemed to him that the only way of arresting the terrible progress of rent and of checking the rising price of corn and the downward tendency of profits was by the freest importation of foreign corn.[355]

In addition to this twofold argument in favour of Free Trade, Ricardo brings forward another which is of considerable importance even at the present time. This argument is based upon the advantages which accrue from the territorial division of labour. “By stimulating industry, by rewarding ingenuity, and by using most efficaciously the peculiar powers bestowed by Nature, it distributes labour most effectively and most economically.”

It may be worth while remarking that his illustrious contemporary Malthus remained more or less of a Protectionist.[356] It might seem strange that Malthus, continually haunted as he was by the spectre of famine, should refuse to welcome importation. But his point of view was doubtless largely that of the modern agricultural Protectionist, who believes that the surest way of preserving a country from famine is not to abandon its agriculture to the throes of foreign competition, but, on the contrary, to strengthen and develop the home industry by securing it a sufficiently high price for its products. We must also remember that Malthus’s theory of rent differed somewhat from Ricardo’s, and that he was not so violently opposed to State intervention.[357]

But Ricardo’s principal contribution to the science was his discovery of the laws governing the movements of commodities and the counter-movements of money from one place to another, and the admirable demonstration which he has given us of this remarkable ebb and flow.

As soon as the balance of commerce becomes unfavourable to France, let us say—that is, as soon as importation exceeds exportation say by £1,000,000—money is exported to pay for this excessive importation. Money becomes scarce, its value rises, and prices fall. But a fall in price will check foreign importation and will encourage exportation, so that imports will show signs of falling off while exports will grow. Money will no longer be sent abroad, and the current will begin to run the other way, until the £1,000,000 sent abroad is returned again. Moreover, the £1,000,000 sent abroad will cause a movement in the opposite direction—superabundance and a depreciation in the value of money, high prices, a premium on importation and a check upon exportation. Accordingly economic forces on both sides will conspire to bring back the balance of commerce to a position of equilibrium—that is, to that position where each country will possess just the quantity of money that it needs.

It might be pointed out, on the other hand, that this somewhat complicated mechanism can only operate very slowly, and that considerable time must elapse before the prices of goods begin to respond to the change in the quantity of money. But as a matter of fact it is not necessary to wait until this phenomenon becomes established, for another striking feature precedes it and announces its approach so to speak, and this is, as Smith had already noted, a change in the value of bills drawn on foreign countries. The foreign exchanges are so sensitive that the slightest rise is enough to stimulate exportation and to check importation.

Accordingly money seldom leaves a country, or only leaves it for a short time. In other words, contrary to the generally accepted opinion, silver and gold in international trade do little more than oil the wheels of commerce. The trade is carried on as if the metals were non-existent. In short, it is essentially of the nature of barter.[358]

The explanation is very schematic. Every incidental phenomenon is omitted, and the whole theory implies the validity of the quantity theory of money, which is now open to considerable criticism as being altogether inadequate for an explanation of the facts involved. But this theory of the automatic regulation of the balance of trade by means of variations in the value of money, although already hinted at by Hume and Smith, is none the less a discovery of the first order, and one that has done service as a working hypothesis for a whole century.[359]

Its explanation turns upon a particular theory of international trade which we can only mention in passing, but which we shall find more fully developed in Stuart Mill’s theory of international values.

4. PAPER MONEY, ITS ISSUE AND REGULATION

The enunciation of the principles which should govern the conduct of bankers in issuing paper money is another debt that we owe to the genius of Ricardo. The Bank Act of 1822, and that of 1844 especially, which laid down the future policy of the Bank of England, represent an attempt on the part of the Government to put his principles into practice.

Ricardo was an eye-witness of the great panic of February 26, 1797, when the reserves of the Bank of England fell from ten millions to a million and a half, necessitating an Order in Council suspending cash payments. The suspension, which was supposed to be a temporary expedient, extended right up to 1821. The depreciation in the value of the bank-note averaged about 10 per cent., but at one period towards the end of the Napoleonic wars it rose as high as 30 per cent. He also witnessed the suffering which such depreciation caused. Landlords demanded the payment of their rents in gold, or claimed an increase in the rent equal to the fall in the value of the note.

Ricardo tried to unravel the causes of this depreciation in his pamphlet entitled _The High Price of Bullion_, published in 1809, and came to the conclusion that there was only one cause, namely, an excessive supply of paper. At this distance of time it might not be thought such an extraordinary discovery after all. Still, he had the greatest difficulty in getting people to admit this, and in refuting the absurd explanations which had previously been suggested. He showed how a depreciation in the value of the note necessarily resulted in the exportation of gold, although most of his contemporaries, on the contrary, believed that the exportation of gold was the cause of all the mischief which they sought to check by an Act of Parliament. “The remedy which I propose for all the evils in our currency is that the Bank should gradually decrease the amount of their notes in circulation until they shall have rendered the remainder of equal value with the coins which they represent, or in other words till the prices of gold and silver bullion shall be brought down to their Mint price.”[360]

But if that is the case why not cut the Gordian knot and suppress paper money altogether? The reply shows how well Ricardo had studied Smith: “A well-regulated paper currency is so great an improvement in commerce that I should greatly regret if prejudice should induce us to return to a system of less utility.” “The introduction of the precious metals for the purposes of money may with truth be considered as one of the most important steps towards the improvement of commerce and the arts of civilised life; but it is no less true that with the advancement of knowledge and science we discover that it would be another improvement to banish them again from the employment to which, during a less enlightened period, they had been so advantageously applied.”[361]

Proceeding, he points out that where you have only metallic money it might happen that the production of gold fails to keep pace with the growth of population, in which case you have a rise in the value of gold accompanied by a fall in prices. This danger might be obviated by a careful issue of notes in accordance with the demands of society. In short, Ricardo is so little disposed to abandon the system of paper money and to return to the previous system of metallic money that, on the contrary, he would prefer to abolish the metallic system altogether, taking good care that paper money did not become superabundant.

So convinced was he of the superiority of paper money that he had no desire to see the Bank resume cash payment. The result of the resumption would be a demand on the part of the public for a conversion of their paper money, “and thus, to indulge a mere caprice, a most expensive medium would be substituted for one of little value.”

But if the notes are not convertible into cash, what is there to guarantee their value or to regulate their issue and prevent depreciation? This can be done merely by keeping a reserve of gold at the bank, not necessarily in the form of money, but in the form of ingots. The bank would not be allowed to issue any notes beyond the value of these ingots. This regulation would have the effect of keeping the value of the note at par, for bankers and money-dealers would immediately proceed to convert these notes into gold as soon as they showed any signs of depreciation. This would not mean, however, that the public at large would again return to the use of metallic money, for these ingots would be of little use for purposes of everyday life.

It is a curious system. One would hardly expect the great champion of Liberal political economy to outline a banking system which could only operate through a State bank. This was clearly his opinion, however. He declared himself utterly opposed to the free banking system, and doubted the ability of such a system to regulate the currency. “In that sense there can be no excess whilst the bank does not pay in specie, because the commerce of the country can easily employ and absorb any sum which the bank may send into circulation.”[362] This shows what little confidence a Liberal individualist like Ricardo had in the liberty of individuals and their ability to judge of the kind of money that is most serviceable.

* * * * *

Ricardo’s disciples are legion, and among them is every economist of standing of the earlier part of the nineteenth century. The best known among these are the three writers who immediately follow him in chronological order: James Mill, the father of John Stuart Mill (_Elements of Political Economy_, 1821), his friend McCulloch (_Principles of Political Economy_, 1825), and Nassau Senior (_Political Economy_, 1836).

The two first-named writers contented themselves with a vigorous defence of the master’s views without contributing anything very new. We have already referred to the very different conclusions which James Mill draws from the theory of rent, and how he became an advocate of land nationalisation. McCulloch also was one of the earliest advocates of the right to strike.

Senior deserves a few pages to himself, for his work in systematising the Classical doctrines. We shall deal with him in our chapter on John Stuart Mill.