EFFECTS OF ACCUMULATION ON PROFITS AND INTEREST.
From the account which has been given of the profits of stock, it will
appear, that no accumulation of capital will permanently lower profits,
unless there be some permanent cause for the rise of wages. If the funds
for the maintenance of labour were doubled, trebled, or quadrupled,
there would not long be any difficulty in procuring the requisite number
of hands, to be employed by those funds; but owing to the increasing
difficulty of making constant additions to the food of the country,
funds of the same value would probably not maintain the same quantity of
labour. If the necessaries of the workman could be constantly increased
with the same facility, there could be no permanent alteration in the
rate of profits or wages, to whatever amount capital might be
accumulated. Adam Smith, however, uniformly ascribes the fall of profits
to accumulation of capital, and to the competition which will result
from it, without ever adverting to the increasing difficulty of
providing food for the additional number of labourers which the
additional capital will employ. "The increase of stock he says, which
raises wages, tends to lower profit. When the stocks of many rich
merchants are turned into the same trade, their mutual competition
naturally tends to lower its profit; and when there is a like increase
of stock in all the different trades carried on in the same society, the
same competition must produce the same effect in all." Adam Smith speaks
here of a rise of wages, but it is of a temporary rise, proceeding from
increased funds before the population is increased; and he does not
appear to see, that at the same time that capital is increased, the work
to be effected by capital, is increased in the same proportion. M. Say
has however most satisfactorily shewn, that there is no amount of
capital which may not be employed in a country, because demand is only
limited by production. No man produces, but with a view to consume or
sell, and he never sells, but with an intention to purchase some other
commodity, which may be immediately useful to him, or which may
contribute to future production. By producing, then, he necessarily
becomes either the consumer of his own goods, or the purchaser and
consumer of the goods of some other person. It is not to be supposed
that he should, for any length of time, be ill-informed of the
commodities which he can most advantageously produce, to attain the
object which he has in view, namely, the possession of other goods; and
therefore it is not probable that he will continually produce a
commodity for which there is no demand.[32]
There cannot then be accumulated in a country any amount of capital
which cannot be employed productively, until wages rise so high in
consequence of the rise of necessaries, and so little consequently
remains for the profits of stock, that the motive for accumulation
ceases.[33] While the profits of stock are high, men will have a motive
to accumulate. Whilst a man has any wished-for gratification unsupplied
he will have a demand for more commodities; and it will be an effectual
demand while he has any new value to offer in exchange for them. If ten
thousand pounds were given to a man having 100,000_l._ per annum, he
would not lock it up in a chest, but would either increase his expenses
by 10,000_l._; employ it himself productively, or lend it to some other
person for that purpose; in either case, demand would be increased,
although it would be for different objects. If he increased his
expenses, his effectual demand might probably be for buildings,
furniture, or some such enjoyment. If he employed his 10,000_l._
productively, his effectual demand would be for food, clothing, and raw
material, which might set new labourers to work; but still it would be
demand.[34]
Productions are always bought by productions, money is only the medium
by which the exchange is effected. Too much of a particular commodity
may be produced, of which there may be such a glut in the market, as not
to repay the capital expended on it; but this cannot be the case with
respect to all commodities; the demand for corn is limited by the mouths
which are to eat it, for shoes and coats by the persons who are to wear
them; but though a community, or a part of a community, may have as much
corn, and as many hats and shoes, as it is able or may wish to consume,
the same cannot be said of every commodity produced by nature or by art.
Some would consume more wine, if they had the ability to procure it.
Others having enough of wine, would wish to increase the quantity or
improve the quality of their furniture. Others might wish to ornament
their grounds, or to enlarge their houses. The wish to do all or some of
these is implanted in every man's breast; nothing is required but the
means, and nothing can afford the means, but an increase of production.
If I had food and necessaries at my disposal, I should not be long in
want of workmen who would put me in possession of some of the objects
most useful or most desirable to me.
Whether these increased productions, and the consequent demand which
they occasion, shall or shall not lower profits, depends solely on the
rise of wages; and the rise of wages, excepting for a limited period, on
the facility of producing the food and necessaries of the labourer. I
say excepting for a limited period, because no point is better
established, than that the supply of labourers will always ultimately be
in proportion to the means of supporting them.
There is only one case, and that will be temporary, in which the
accumulation of capital with a low price of food may be attended with a
fall of profits; and that is, when the funds for the maintenance of
labour increase much more rapidly than population;--wages will then be
high, and profits low. If every man were to forego the use of luxuries,
and be intent only on accumulation, a quantity of necessaries might be
produced, for which there could not be any immediate consumption. Of
commodities so limited in number, there might undoubtedly be an
universal glut, and consequently there might neither be demand for an
additional quantity of such commodities, nor profits on the employment
of more capital. If men ceased to consume, they would cease to produce.
This admission, does not impugn the general principle. In such a country
as England, for example, it is difficult to suppose that there can be
any disposition to devote the whole capital and labour of the country to
the production of necessaries only.
When merchants engage their capitals in foreign trade, or in the
carrying trade, it is always from choice, and never from necessity: it
is because in that trade their profits will be somewhat greater than in
the home trade.
Adam Smith has justly observed "that the desire of food is limited in
every man by the narrow capacity of the human stomach, but the desire of
the conveniences and ornaments of building, dress, equipage, and
household furniture, seems to have no limit or certain boundary." Nature
then has necessarily limited the amount of capital which can at any one
time be profitably engaged in agriculture, but she has placed no limits
to the amount of capital that may be employed in procuring "the
conveniences and ornaments" of life. To procure these gratifications in
the greatest abundance is the object in view, and it is only because
foreign trade, or the carrying trade, will accomplish it better, that
men engage in them, in preference to manufacturing the commodities
required, or a substitute for them, at home. If, however, from peculiar
circumstances, we were precluded from engaging capital in foreign trade,
or in the carrying trade, we should, though with less advantage, employ
it at home; and while there is no limit to the desire of "conveniences,
ornaments of building, dress, equipage, and household furniture," there
can be no limit to the capital that may be employed in procuring them,
except that which bounds our power to maintain the workmen who are to
produce them.
Adam Smith however, speaks of the carrying trade as one not of choice,
but of necessity; as if the capital engaged in it would be inert if not
so employed, as if the capital in the home trade could overflow, if not
confined to a limited amount. He says, "when the capital stock of any
country is increased to such a degree, _that it cannot be all employed
in supplying the consumption, and supporting the productive labour of
that particular country_, the surplus part of it naturally disgorges
itself into the carrying trade, and is employed in performing the same
offices to other countries."
"About ninety-six thousand hogsheads of tobacco are annually purchased
with a part of the surplus produce of British industry. But the demand
of Great Britain does not require, perhaps, more than fourteen thousand.
If the remaining eighty-two thousand, therefore, could not be sent
abroad _and exchanged for something more in demand at home_, the
importation of them would cease immediately, _and with it the productive
labour of all the inhabitants of Great Britain, who are at present
employed in preparing the goods with which these eighty-two thousand
hogsheads are annually purchased_." But could not this portion of the
productive labour of Great Britain be employed in preparing some other
sort of goods, with which something more in demand at home might be
purchased? And if it could not, might we not employ this productive
labour, though with less advantage, in making those goods in demand at
home, or at least some substitute for them? If we wanted velvets, might
we not attempt to make velvets; and if we could not succeed, might we
not make more cloth, or some other object desirable to us?
We manufacture commodities, and with them buy goods abroad, because we
can obtain a greater quantity than we could make at home. Deprive us of
this trade, and we immediately manufacture again for ourselves. But this
opinion of Adam Smith is at variance with all his general doctrines on
this subject. "If a foreign country can supply us with a commodity
cheaper than we ourselves can make it, better buy it of them with some
part of the produce of our own industry, employed in a way in which we
have some advantage. _The general industry of the country being always
in proportion to the capital which employs it_, will not thereby be
diminished, but only left to find out the way in which it can be
employed with the greatest advantage."
Again. "Those, therefore, who have the command of more food than they
themselves can consume, are always willing to exchange the surplus, or,
what is the same thing, the price of it, for gratifications of another
kind. What is over and above satisfying the limited desire, is given for
the amusement of those desires which cannot be satisfied, but seem to be
altogether endless. The poor, in order to obtain food, exert themselves
to gratify those fancies of the rich; and to obtain it more certainly,
they vie with one another in the cheapness and perfection of their work.
The number of workmen increases with the increasing quantity of food, or
with the growing improvement and cultivation of the lands; and as the
nature of their business admits of the utmost subdivisions of labours,
the quantity of materials which they can work up increases in a much
greater proportion than their numbers. Hence arises a demand for every
sort of material which human invention can employ, either usefully or
ornamentally, in building, dress, equipage, or household furniture; for
the fossils and minerals contained in the bowels of the earth, the
precious metals, and the precious stones."
Adam Smith has justly observed, that it is extremely difficult to
determine the rate of the profits of stock. "Profit is so fluctuating,
that even in a particular trade, and much more in trades in general, it
would be difficult to state the average rate of it. To judge of what it
may have been formerly, or in remote periods of time, with any degree of
precision, must be altogether impossible." Yet since it is evident that
much will be given for the use of money, when much can be made by it, he
suggests, that "the market rate of interest will lead us to form some
notion of the rate of profits, and the history of the progress of
interest afford us that of the progress of profits." Undoubtedly if the
market rate of interest could be accurately known for any considerable
period, we should have a tolerably correct criterion, by which to
estimate the progress of profits.
But in all countries, from mistaken notions of policy, the state has
interfered to prevent a fair and free market rate of interest, by
imposing heavy and ruinous penalties on all those who shall take more
than the rate fixed by law. In all countries probably these laws are
evaded, but records give us little information on this head, and point
out rather the legal and fixed rate, than the market rate of interest.
During the present war, exchequer and navy bills have frequently been at
so high a discount, as to afford the purchasers of them 7, 8 per cent.,
or a greater rate of interest for their money. Loans have been raised by
Government at an interest exceeding 6 per cent., and individuals have
been frequently obliged, by indirect means, to pay more than 10 per
cent., for the interest of money; yet during this same period the legal
rate of interest has been uniformly at 5 per cent. Little dependance for
information then can be placed on that which is the fixed and legal rate
of interest, when we find it may differ so considerably from the market
rate. Adam Smith informs us, that from the 37th of Henry VIII., to 21st
of James I., 10 per cent. continued to be the legal rate of interest.
Soon after the restoration, it was reduced to 6 per cent., and by the
12th of Anne, to 5 per cent. He thinks the legal rate followed, and did
not precede the market rate of interest. Before the American War,
Government borrowed at 3 per cent., and the people of credit in the
capital, and in many other parts of the kingdom at 3-1/2, 4, and 4-1/2
per cent.
The rate of interest, though ultimately and permanently governed by the
rate of profit, is however subject to temporary variations from other
causes. With every fluctuation in the quantity and value of money, the
prices of commodities naturally vary. They vary also, as we have already
shewn, from the alteration in the proportion of supply to demand,
although there should not be either greater facility or difficulty of
production. When the market prices of goods fall from an abundant
supply, from a diminished demand, or from a rise in the value of money,
a manufacturer naturally accumulates an unusual quantity of finished
goods, being unwilling to sell them at very depressed prices. To meet
his ordinary payments, for which he used to depend on the sale of his
goods, he now endeavours to borrow on credit, and is often obliged to
give an increased rate of interest. This however is but of temporary
duration; for either the manufacturer's expectations were well grounded,
and the market price of his commodities rises, or he discovers that
there is a permanently diminished demand, and he no longer resists the
course of affairs: prices fall, and money and interest regain their real
value. If by the discovery of a new mine, by the abuses of banking, or
by any other cause, the quantity of money be greatly increased, its
ultimate effect is to raise the prices of commodities in proportion to
the increased quantity of money; but there is probably always an
interval, during which some effect is produced on the rate of interest.
The price of funded property is not a steady criterion by which to judge
of the rate of interest. In time of war, the stock market is so loaded
by the continual loans of Government, that the price of stock has not
time to settle at its fair level before a new operation of funding takes
place, or it is affected by anticipation of political events. In time of
peace, on the contrary, the operations of the sinking fund, the
unwillingness, which a particular class of persons feel to divert their
funds to any other employment than that to which they have been
accustomed, which they think secure, and in which their dividends are
paid with the utmost regularity, elevates the price of stock, and
consequently depresses the rate of interest on these securities below
the general market rate. It is observable too, that for different
securities, Government pays very different rates of interest. Whilst
100_l._ capital in 5 per cent. stock is selling for 95_l._, an exchequer
bill of 100_l._, will be sometimes selling for 100_l._ 5_s._, for which
exchequer bill, no more interest will be annually paid than 4_l._ 11_s._
3_d._: one of these securities pays to a purchaser at the above prices,
an interest of more than 5-1/4 per cent., the other but little more than
4-1/4; a certain quantity of these exchequer bills is required as a safe
and marketable investment for bankers; if they were increased much
beyond this demand, they would probably be as much depreciated as the 5
per cent. stock. A stock paying 3 per cent. per annum will always sell
at a proportionally greater price than stock paying 5 per cent., for
the capital debt of neither can be discharged but at par, or 100_l._
money for 100_l._ stock. The market rate of interest may fall to 4 per
cent., and Government would then pay the holder of 5 per cent. stock at
par, unless he consented to take 4 per cent., or some diminished rate of
interest under 5 per cent.: they would have no advantage from so paying
the holder of 3 per cent. stock, till the market rate of interest had
fallen below 3 per cent. per annum. To pay the interest on the national
debt, large sums of money are withdrawn from circulation four times in
the year for a few days. These demands for money being only temporary,
seldom affect prices; they are generally surmounted by the payment of a
large rate of interest.[36]