On the day that you were writing your last letter to me, I was
travelling to London with Mrs. Ricardo, where my business detained me a
little more than a week. On my return your letter was delivered to me. I
am sorry that you cannot make it convenient to pay us a visit at
Christmas. I shall however depend on your not allowing any common
occurrence to prevent you and Mrs. Malthus from favouring[67] us with
your company during your next summer vacation. I hope you will not
repent having set me the example of using a larger sized paper. If you
are tired with my long letter, you only will be to blame for it.
It does not appear to me that we very materially differ in our ideas of
the effects of the facility or difficulty of procuring food on the
profits of stock. You say that I 'seem to think that the state of
production from the land compared with the means necessary to make it
produce is almost the sole cause which regulates the profit of stock and
the means of advantageously employing capital.' This is a correct
statement of my opinion, and not, as you have said in another part of
your letter and which essentially differs from it, 'that it is the
_quantity_ of produce compared with the expense of production that
determines profits.' You, instead of allowing the facility of obtaining
food to be almost the sole cause of high profits, think it may be safely
said to be the main cause, and also a difficulty of acquiring food the
main cause of low profits. There appears to me to be very little
difference in these statements. You infer that my doctrine is not
correct because improvements may take place in agriculture or
manufactures, because new leases may not be granted precisely at the
time of the rise in the price of raw produce, and because the price of
labour may not rise without delay in the same proportion. But
improvements in agriculture or in machinery which shall facilitate or
augment production will according to my proposition increase profits
because 'it will augment production compared with the means necessary
to that production.' The same may be said of the wages of labour not
rising in the same proportion as the price of produce. As for old leases
affecting the question, you will observe that in calculating the profits
made by agriculture we must estimate leases at the value which they bear
at the time of the calculation and not at the value agreed upon at an
antecedent period. If the question were concerning the profits of a
manufactory or distillery for example, we should calculate such profits
according to the then value of barley, although a few individual
distillers might have been so fortunate as to purchase their barley when
it was 25 per cent cheaper. These points then are expressly allowed for
in my proposition, and are by no means at variance with it. You add to
your statement [']that in the interval between the two extremes (of high
profits and low profits caused by facility or difficulty of procuring
food) considerable variations may take place, and that practically no
country was ever in such a state as not to admit of increase of profits
on the land for a period of some duration, from the advanced price of
raw produce.' I agree that variations will take place because the means
of obtaining produce are not always equally expensive; and, if they
should be, the produce itself may become more valuable, and in either
case profits will vary. But even during these temporary variations the
great cause, namely the accumulation of capital, may be paving the way
for permanently diminished profits. It appears to me important to
ascertain what the causes are which may occasion a rise in the price of
raw produce, because the effects of a rise, on profits, may be
diametrically opposite. A rise in the price of raw produce may be
occasioned by a gradual accumulation of capital, which by creating new
demands for labour may give a stimulus to population and consequently
promote the cultivation or improvement of inferior lands; but this will
not cause profits to rise but to fall, because not only will the rate of
wages rise, but more labourers will be employed without affording a
proportional return of raw produce. The whole value of the wages paid
will be greater compared with the whole value of the raw produce
obtained. A rise of raw produce may proceed from one or more bad
seasons, which will undoubtedly increase profits because the price of
produce would rise considerably more than in the proportion of the
deficient quantity, and would therefore be much ahead of the price
[_sic_] of production. An advanced price of raw produce may also proceed
from a fall in the value of currency, which would raise the price of
produce, for a time, more than it would wages, and would therefore raise
profits. Both these you will allow are temporary causes, no way
affecting the principle itself but merely disturbing it in its progress.
Restrictions on importation of raw produce may cause a rise in its price
which will be permanent or temporary according as the bad policy which
dictated the restrictive law may be permanent or temporary. In the first
instance profits will be raised; but they will ultimately fall below
their former level. From what I have said it will appear that I am of
opinion that a permanent rise in the rate of profits on land is never
preceded by a rise but by a fall in the price of raw produce; and,
though profits may be raised by a rise of the price of produce, they
will generally ultimately settle at a rate lower than that from which
they started. The converse of this, as it regards low prices of produce,
I hold to be equally true. I should be glad to have your sentiments on
this point. There may be other causes of high price, which do not at
present occur to me.
I allow that no country ever was or can be in such a situation as not to
admit of increase of profits on the land, because there is no country
which is not liable to lose or waste part of its capital; there is no
country which is not liable to bad seasons, to depreciated currency, to
a real fall in the value of the precious metals, and to other accidents
which will, some permanently and some temporarily, raise profits. You
observe that in rich countries profits are often much higher, and in
poor countries much lower than according to my theory, to which I reply
that profits are very much reduced in the poor country by enormous
wages; the wages themselves may be considered as part of the profits of
stock, and are frequently the foundation of new capital. In rich
countries wages are low, too low for the comforts of the labourers; too
large a portion of the gross produce is retained by the owner of stock
and is reckoned as profit.
I am not aware that I have underrated the effect of the wants and tastes
of mankind on profits; they frequently occasion large profits on
particular commodities for short periods, but they do not, I think,
often operate on general profits, because they do not often influence
the growth of raw produce. Adam Smith, in Book V, ch. i, p. 134[68],
concisely expresses what appears to me correct, of the effects of demand
on the price of commodities. I go much further than you in ascribing
effects to the wants and tastes of mankind; I believe them to be
unlimited. Give men but the means of purchasing, and their wants are
insatiable. Mr. Mill's theory is built on this assumption. It does not
attempt to say what the proportions will be to one another of the
commodities which will be produced in consequence of the accumulation of
capital, but presumes that those commodities only will be produced which
will be suited to the wants and tastes of mankind, because none other
will be demanded.
The very term 'accumulation of capital' supposes a power somewhere to
employ more labour; it supposes the total income of the society to be
increased, and therefore to create a demand for more food and more
commodities. You ask 'whether we can furnish to persons of the same
incomes a great additional quantity of commodities without lowering the
price so much compared with the price of production as to destroy the
effective demand for such a supply, and consequently to check its
continuance to the same extent.' We answer this is not our case; we are
speaking of larger incomes, not of the same incomes; and instead of
anticipating a fall in the price of commodities we should expect a rise,
because the fall of profits which generally follows accumulation is in
consequence of the increase in the price of production, compared with
the price of produce, although they would both undoubtedly rise. You
appear to think, indeed you say, 'that you know no other cause for the
fall of profits which generally takes place from accumulation than that
the price of produce falls compared with the expense of production, or
in other words, that the _effective_ demand is diminished;' and by what
follows you seem to infer that commodities will not only be relatively
lower but really lower; and this is in fact the foundation of our
difference with regard to the theory of Mr. Mill.
You will by this time feel that you have enough if not too much.
Yours truly,
DAVID RICARDO.
NOTE.--The passage of the Wealth of Nations is as follows:--'The
East India Company represented in very strong terms what had been at
this time [1730] the miserable effects, as they thought them, of
this competition [between themselves and the Old East India Company
and private traders]. In India, they said, it raised the price of
goods so high that they were not worth buying; and in England, by
overstocking the market, it sunk their price so low that no profit
could be made by them. That by a more plentiful supply, to the
great advantage and conveniency of the public, it must have reduced
very much the price of India goods in the English market cannot well
be doubted; but that it should have raised very much their price in
the Indian market seems not very probable, as all the extraordinary
demand which that competition could occasion must have been but as a
drop of water in the immense ocean of Indian commerce. The increase
of demand, besides, though in the beginning it may sometimes raise
the price of goods, never fails to lower it in the long run. It
encourages production, and thereby increases the competition of the
producers, who, in order to undersell one another, have recourse to
new divisions of labour and new improvements of art, which might
never otherwise have been thought of. The miserable effects of which
the company complained were the cheapness of consumption and the
encouragement given to production: precisely the two effects which
it is the great business of political economy to promote.'