because a labourer could obtain two pecks of flour instead of one, for a
day's labour; but if last year he received, for a day's labour,
something which required eight hours' labour to produce it, and this
year something which requires nine hours, then Mr. Ricardo would say
that wages had risen. A rise of wages, with Mr. Ricardo, meant an
increase in the cost of production of wages; an increase in the number
of hours' labour which go to produce the wages of a day's labour; an
increase in the _proportion_ of the fruits of labour which the labourer
receives for his own share; an increase in the ratio between the wages
of his labour and the produce of it. This is the theory: the reasoning,
of which it is the result, has been given in the preceding paragraphs.
Some of Mr. Ricardo's followers, or more properly, of those who have
adopted in most particulars the views of political economy which his
genius was the first to open up, have given explanations of Mr.
Ricardo's doctrine to nearly the same effect as the above, but in rather
different terms. They have said that profits depend not on _absolute_,
but on _proportional_ wages: which they expounded to mean the proportion
which the labourers _en masse_ receive of the total produce of the
country.
It seems, however, to be rather an unusual and inconvenient use of
language to speak of anything as depending upon the wages of labour, and
then to explain that by wages of labour you do not mean the wages of an
individual labourer, but of all the labourers in the country
collectively. Mankind will never agree to call anything a rise of wages,
except a rise of the wages of individual labourers, and it is therefore
preferable to employ language tending to fix attention upon the wages of
the individual. The wages, however, on which profits are said to depend,
are undoubtedly _proportional_ wages, namely, the proportional wages of
one labourer: that is, the ratio between the wages of one labourer, and
(not the whole produce of the country, but) the amount of what one
labourer can produce; the amount of that portion of the collective
produce of the industry of the country, which may be considered as
corresponding to the labour of one single labourer. Proportional wages,
thus understood, may be concisely termed the cost of production of
wages; or, more concisely still, the cost of wages, meaning their cost
in the "original purchase money," labour.
We have now arrived at a distinct conception of Mr. Ricardo's theory of
profits in its most perfect state. And this theory we conceive to be the
basis of the true theory of profits. All that remains to do is to clear
it from certain difficulties which still surround it, and which, though
in a greater degree apparent than real, are not to be put aside as
wholly imaginary.
Though it is true that tools, materials, and buildings (it is to be
wished that there were some compact designation for all these essentials
of production taken together,) are themselves the produce of labour, and
are only on that account to be ranked among the expenses of production;
yet the _whole_ of their value is not resolvable into the wages of the
labourers by whom they were produced. The wages of those labourers were
paid by a capitalist, and that capitalist must have the same profit upon
his advances as any other capitalist; when, therefore, he sells the
tools or materials, he must receive from the purchaser not only the
reimbursement of the wages he has paid, but also as much more as will
afford him the ordinary rate of profit. And when the producer, after
buying the tools and employing them in his own occupation, comes to
estimate his gains, he must set aside a portion of the produce to
replace not only the wages paid both by himself and by the tool-maker,
but also the profits of the tool-maker, advanced by himself out of his
own capital.
It is not correct, therefore, to state that all which the capitalist
retains after replacing wages forms his profit. It is true the whole
return to capital is either wages or profits; but profits do not compose
merely the surplus after replacing the outlay; they also enter into the
outlay itself. Capital is expended partly in paying or reimbursing
wages, and partly in paying the profits of other capitalists, whose
concurrence was necessary in order to bring together the means of
production.
If any contrivance, therefore, were devised by which that part of the
outlay which consists of previous profits could be either wholly or
partially dispensed with, it is evident that more would remain as the
profit of the immediate producer; while, as the quantity of _labour_
necessary to produce a given quantity of the commodity would be
unaltered, as well as the quantity of produce paid for that labour, it
seems that the ratio between the price of labour and its produce would
be the same as before; that the cost of production of wages would be the
same, proportional wages the same, and yet profits different.
To illustrate this by a simple instance, let it be supposed that
one-third of the produce is sufficient to replace the wages of the
labourers who have been immediately instrumental in the production; that
another third is necessary to replace the materials used and the fixed
capital worn out in the process; while the remaining third is clear
gain, being a profit of 50 per cent. Suppose, for example, that 60
agricultural labourers, receiving 60 quarters of corn for their wages,
consume fixed capital and seed amounting to the value of 60 quarters
more, and that the result of their operations is a produce of 180
quarters. When we analyse the price of the seed and tools into its
elements, we find that they must have been the produce of the labour of
40 men: for the wages of those 40, together with profit at the rate
previously supposed (50 per cent) make up 60 quarters. The produce,
therefore, consisting of 180 quarters is the result of the labour
altogether of 100 men: namely, the 60 first mentioned, and the 40 by
whose labour the fixed capital and the seed were produced.
Let us now suppose, by way of an extreme case, that some contrivance is
discovered, whereby the purposes to which the second third of the
produce had been devoted, may be dispensed with altogether: that some
means are invented by which the same amount of produce may be procured
without the assistance of any fixed capital, or the consumption of any
seed or material sufficiently valuable to be worth calculating. Let us,
however, suppose that this cannot be done without taking on a number of
additional labourers, equal to those required for producing the seed and
fixed capital; so that the saving shall be only in the profits of the
previous capitalists. Let us, in conformity with this supposition,
assume that in dispensing with the fixed capital and seed, value 60
quarters, it is necessary to take on 40 additional labourers, receiving
a quarter of corn each, as before.
The rate of profit has evidently risen. It has increased from 50 per
cent to 60 per cent. A return of 180 quarters could not before be
obtained but by an outlay of 120 quarters; it can now be obtained by an
outlay of no more than 100.
Here, therefore, is an undeniable rise of profits. Have wages, in the
sense above attached to them, fallen or not? It would seem not.
The produce (180 quarters) is still the result of the same quantity of
labour as before, namely, the labour of 100 men. A quarter of corn,
therefore, is still, as before, the produce of 10/18 of a man's labour
for a year. Each labourer receives, as before, one quarter of corn;
each, therefore, receives the produce of 10\18 of a year's labour of one
man, that is, the same cost of production; each receives 10/18 of the
produce of his own labour, that is, the same proportional wages; and the
labourers collectively still receive the same proportion, namely 10/18,
of the whole produce.
The conclusion, then, cannot be resisted, that Mr. Ricardo's theory is
defective: that the rate of profits does _not_ exclusively depend upon
the value of wages, in his sense, namely, the quantity of labour of
which the wages of a labourer are the produce; that it does _not_
exclusively depend upon proportional wages, that is, upon the proportion
which the labourers collectively receive of the whole produce, or the
ratio which the wages of an individual labourer bear to the produce of
his individual labour.
Those political economists, therefore, who have always dissented from
Mr. Ricardo's doctrine, or who, having at first admitted, ended by
discarding it, were so far in the right; but they committed a serious
error in this, that, with the usual one-sidedness of disputants, they
knew no medium between admitting absolutely and dismissing entirely;
and saw no other course than utterly to reject what it would have been
sufficient to modify.
It is remarkable how very slight a modification will suffice to render
Mr. Ricardo's doctrine completely true. It is even doubtful whether he
himself, if called upon to adapt his expressions to this peculiar case,
would not have so explained his doctrine as to render it entirely
unobjectionable.
It is perfectly true, that, in the example already made use of, a rise
of profits takes place, while wages, considered in respect to the
quantity of labour of which they are the produce, have not varied at
all. But though wages are still the produce of the same _quantity of
labour_ as before, the _cost of production_ of wages has nevertheless
fallen; for into cost of production there enters another element besides
labour.
We have already remarked (and the very example out of which the
difficulty arose presupposes it) that the cost of production of an
article consists generally of two parts,--the _wages_ of the labour
employed, and the _profits_ of those who, in any antecedent stage of
the production, have advanced any portion of those wages. An article,
therefore, may be the produce of the same quantity of labour as before,
and yet, if any portion of the profits which the last producer has to
make good to previous producers can be economized, the cost of
production of the article is diminished.
Now, in our example, a diminution of this sort is supposed to have taken
place in the cost of production of corn. The production of that article
has become less costly, in the ratio of six to five. A quantity of corn,
the means of producing which could not previously have been secured but
at an expense of 120 quarters, can now be produced by means which 100
quarters are sufficient to purchase.
But the labourer is supposed to receive the same quantity of corn as
before. He receives one quarter. The cost of production of wages has,
therefore, fallen one-sixth. A quarter of corn, which is the
remuneration of a single labourer, is indeed the produce of the same
quantity of labour as before; but its cost of production is nevertheless
diminished. It is now the produce of 10/18 of a man's labour, and
nothing else; whereas formerly it required for its production the
conjunction of that quantity of labour with an expenditure, in the form
of reimbursement of profit, amounting to one-fifth more.
If the cost of production of wages had remained the same as before,
profits could not have risen. Each labourer received one quarter of
corn; but one quarter of corn at that time was the result of the same
cost of production, as 1 1/5 quarter now. In order, therefore, that each
labourer should receive the same cost of production, each must now
receive one quarter of corn, _plus_ one-fifth. The labour of 100 men
could not be purchased at this price for less than 120 quarters; and the
produce, 180 quarters, would yield only 50 per cent, as first supposed [7].
It is, therefore, strictly true, that the rate of profits varies
inversely as the cost of production of wages. Profits cannot rise,
unless the cost of production of wages falls exactly as much; nor fall,
unless it rises.
The proof of this position has been stated in figures, and in a
particular case: we shall now state it in general terms, and for all
cases.
We have supposed, for simplicity, that wages are paid in the finished
commodity. The agricultural labourers, in our example, were paid in
corn, and if we had called them weavers, we should have supposed them to
be paid in cloth. This supposition is allowable, for it is obviously of
no consequence, in a question of value, or cost of production, what
precise article we assume as the medium of exchange. The supposition
has, besides, the recommendation of being conformable to the most
ordinary state of the facts; for it is by the sale of his own finished
article that each capitalist obtains the means of hiring labourers to
renew the production; which is virtually the same thing as if, instead
of selling the article for money and giving the money to his labourers,
he gave the article itself to the labourers, and they sold it for their
daily bread.
Assuming, therefore, that the labourer is paid in the very article he
produces, it is evident that, when any saving of expense takes place in
the production of that article, if the labourer still receives the same
cost of production as before, he must receive an increased quantity, in
the very same ratio in which the productive power of capital has been
increased. But, if so, the outlay of the capitalist will bear exactly
the same proportion to the return as it did before; and profits will not
rise.
The variations, therefore, in the rate of profits, and those in the cost
of production of wages, go hand in hand, and are inseparable. Mr.
Ricardo's principle, that profits cannot rise unless wages fall, is
strictly true, if by low wages be meant not merely wages which are the
produce of a smaller quantity of labour, but wages which are produced at
less cost, reckoning labour and previous profits together. But the
interpretation which some economists have put upon Mr. Ricardo's
doctrine, when they explain it to mean that profits depend upon the
proportion which the labourers collectively receive of the aggregate
produce, will not hold at all; for that, in our first example, remained
the same, and yet profits rose.
The only expression of the law of profits, which seems to be correct,
is, that they depend upon the cost of production of wages. This must be
received as the ultimate principle.
From this may be deduced all the corollaries which Mr. Ricardo and
others have drawn from his theory of profits as expounded by himself.
The cost of production of the wages of one labourer for a year, is the
result of two concurrent elements or factors,--viz., 1st, the quantity
of commodities which the state of the labour market affords to him;
2ndly, the cost of production of each of those commodities. It follows,
that the rate of profits can never rise but in conjunction with one or
other of two changes,--1st, a diminished remuneration of the labourer;
or, 2ndly, an improvement in production, or an extension of commerce, by
which any of the articles habitually consumed by the labourer may be
obtained at smaller cost. (If the improvement be in any article which is
not consumed by the labourer, it merely lowers the price of that article,
and thereby benefits capitalists and all other people so far as they are
consumers of that particular article, and may be said to increase gross
profit, but not the rate of profit.)
So, on the other hand, the rate of profit cannot fall, unless
concurrently with one of two events: 1st, an improvement in the
labourer's condition; or, 2ndly, an increased difficulty of producing
or importing some article which the labourer habitually consumes. The
progress of population and cultivation has a tendency to lower profits
through the latter of these two channels, owing to the well known law
of the application of capital to land, that a double capital does not
_caeteris paribus_ yield a double produce. There is, therefore, a
tendency in the rate of profits to fall with the progress of society.
But there is also an antagonist tendency of profits to rise, by the
successive introduction of improvements in agriculture, and in the
production of those manufactured articles which the labourers consume.
Supposing, therefore, that the actual comforts of the labourer remain
the same, profits will fall or rise, according as population, or
improvements in the production of food and other necessaries, advance
fastest.
The rate of profits, therefore, tends to _fall_ from the following
causes:--1. An increase of capital beyond population, producing
increased competition for labour; 2. An increase of population,
occasioning a demand for an increased quantity of food, which must be
produced at a greater cost. The rate of profits tends to _rise_ from
the following causes:--1. An increase of population beyond capital,
producing increased competition for employment; 2. Improvements
producing increased cheapness of necessaries, and other articles
habitually consumed by the labourer.
* * * * *
The circumstances which regulate the rate of interest have usually been
treated, even by professed writers on political economy, in a vague,
loose, and unscientific manner. It has, however, been felt that there is
some connexion between the rate of interest and the rate of profit; that
(to use the words of Adam Smith) much will be given for money, when much
can be made of it. It has been felt, also, that the fluctuations in the
market-rate of interest from day to day, are determined, like other
matters of bargain and sale, by demand and supply. It has, therefore,
been considered as an established principle, that the rate of interest
varies from day to day according to the quantity of capital offered or
called for on loan; but conforms on the average of years to a standard
determined by the rate of profits, and bearing some proportion to that
rate--but a proportion which few attempts have been made to define.
In consequence of these views, it has been customary to judge of the
general rate of profits at any time or place, by the rate of interest at
that time and place: it being supposed that the rate of interest, though
liable to temporary fluctuations, can never vary for any long period of
time unless profits vary; a notion which appears to us to be erroneous.
It was observed by Adam Smith, that profits may be considered as divided
into two parts, of which one may properly be considered as the
remuneration for the use of the capital itself, the other as the reward
of the labour of superintending its employment; and that the former of
these will correspond with the rate of interest. The producer who
borrows capital to employ it in his business, will consent to pay, for
the use of it, all that remains of the profits he can make by it, after
reserving what he considers reasonable remuneration for the trouble and
risk which he incurs by borrowing and employing it.
This remark is just; but it seems necessary to give greater precision to
the ideas which it involves.
The difference between the profit which can be made by the use of
capital, and the interest which will be paid for it, is rightly
characterized as wages of superintendance. But to infer from this that
it is regulated by entirely the same principles as other wages, would be
to push the analogy too far. It is wages, but wages paid by a commission
upon the capital employed. If the general rate of profit is 10 per cent,
and the rate of interest 5 per cent, the wages of superintendance will
be 5 per cent; and though one borrower employ a capital of 100,000_l_.,
another no more than 100_l_., the labour of both will be rewarded with
the same per centage, though, in the one ease, this symbol will
represent an income of 5_l_., in the other case, of 5000_l_. Yet it
cannot be pretended that the labour of the two borrowers differs in this
proportion. The rule, therefore, that equal quantities of labour of
equal hardness and skill are equally remunerated, does not hold of this
kind of labour. The wages of any other labour are here an inapplicable
criterion.
The wages of superintendance are distinguished from ordinary wages by
another peculiarity, that they are not paid in advance out of capital,
like the wages of all other labourers, but merge in the profit, and are
not realized until the production is completed. This takes them entirely
out of the ordinary law of wages. The wages of labourers who are paid in
advance, are regulated by the number of competitors compared with the
amount of capital; the labourers can consume no more than what has been
previously accumulated. But there is no such limit to the remuneration
of a kind of labour which is not paid for out of wealth previously
accumulated, but out of that produce which it is itself employed in
calling into existence.
When these circumstances are duly weighed, it will be perceived, that
although profit may be correctly analyzed into interest and wages of
superintendance, we ought not to lay it down as the law of interest,
that it is profits _minus_ the wages of superintendance. Of the two
expressions, it would be decidedly the more correct, that the wages of
superintendance are regulated by the rate of interest, or are equal to
profits _minus_ interest. In strict, propriety, neither expression would
be allowable. Interest, and the wages of superintendance, can scarcely
be said to depend upon one another. They are to one another in the same
relation as wages and profits are. They are like two buckets in a well:
when one rises, the other descends, but neither of the two motions is
the cause of the other; both are simultaneous effects of the same cause,
the turning of the windlass.
* * * * *
There are among the capitalists of every country a considerable number
who are habitually, and almost necessarily, lenders; to whom scarcely
any difference between what they could receive for their money and what
could be made by it, would be an equivalent for incurring the risk and
labour of carrying on business. In this predicament is the property of
widows and orphans; of many public bodies; of charitable institutions;
most property which is vested in trustees; and the property of a great
number of persons unused to business, and who have a distaste for it,
or whose other occupations prevent their engaging in it. How large a
proportion of the property lent to the nation comes under this
description, has been pointed out in Mr. Tooke's _Considerations on the
State of the Currency._
There is another large class, consisting of bankers, bill-brokers, and
others, who are money-lenders by profession; who enter into that
profession with the intention of making such gains as it will yield
them, and who would not be induced to change their business by any but
a very strong pecuniary inducement.
There is, therefore, a large class of persons who are habitually
lenders. On the other hand, all persons in business may be considered
as habitually borrowers. Except in times of stagnation, they are all
desirous of extending their business beyond their own capital, and are
never desirous of lending any portion of their capital except for very
short periods, during which they cannot advantageously invest it in
their own trade.
There is, in short, a productive class, and there is, besides, a class
technically styled the monied class, who live upon the interest of their
capital, without engaging personally in the work of production.
The class of borrowers may be considered as unlimited. There is no
quantity of capital that could be offered to be lent, which the
productive classes would not be willing to borrow, at any rate of
interest which would afford them the slightest excess of profit above a
bare equivalent for the additional risk, incurred by that transaction,
of the evils attendant on insolvency. The only assignable limit to the
inclination to borrow, is the power of giving security: the producers
would find it difficult to borrow more than an amount equal to their own
capital. If more than half the capital of the country were in the hands
of persons who preferred lending it to engaging personally in business,
and if the surplus were greater than could be invested in loans to
Government, or in mortgages upon the property of unproductive consumers;
the competition of lenders would force down the rate of interest very
low. A certain portion of the monied class would be obliged either to
sacrifice their predilections by engaging in business, or to lend on
inferior security; and they would accordingly accept, where they could
obtain good security, an abatement of interest equivalent to the
difference of risk.