 Essays on some Unsettled Questions of Political Economy. Essays on some Unsettled Questions of Political Economy by John Stuart Mill. Essay 2. Consumption on Production. Part 1. Before the appearance of those great writers whose discoveries have given to political economy its present comparatively scientific character, the ideas universally entertained both by theorists and by practical men on the causes of national wealth were grounded upon certain general views which almost all who have given any considerable attention to the subject now justly hold to be completely erroneous. Among the mistakes which were most pernicious in their direct consequences and tended in the greatest degree to prevent a just conception of the objects of the science or of the test to be applied to the solution of the questions which it presents, was the immense importance attached to consumption. The great end of legislation in matters of national wealth, according to the present opinion, was to create consumers. A great and rapid consumption was what the producers of all classes and denominations wanted to enrich themselves and the country. This object under the varying names of an extensive demand, a brisk circulation, a great expenditure of money, and sometimes totodium verbis, a large consumption, was conceived to be the great condition of prosperity. It is not necessary, in the present state of the science, to contest this doctrine in the most flagrantly absurd of its forms or of its applications. The utility of a large government expenditure for the purpose of encouraging industry is no longer maintained. These are not now esteemed to be like the do's of heaven which return again in prolific showers. It is no longer supposed that you benefit the producer by taking his money, provided you give it to him again in exchange for his goods. There is nothing which impresses a person of reflection, with a stronger sense of the shallowness of the political reasonings of the last two centuries, than the general reception so long given to a doctrine which, if it proves anything, proves that the more you take from the pockets of the people to spend on your own pleasures the richer they grow, that the man who steals money out of a shop, provided he expends it all again at the same shop, is a benefactor to the tradesman whom he robs, and that the same operation repeated sufficiently often would make the tradesman's fortune. In opposition to these palpable absurdities, it was triumphantly established by political economists that consumption never needs encouragement. All which is produced is already consumed, either for the purpose of reproduction or of enjoyment. The person who saves his income is no less a consumer than he who spends it. He consumes it in a different way. It supplies food and clothing to be consumed, tools and materials to be used by productive laborers. Consumption therefore already takes place to the greatest extent which the amount of production admits of, but, of the two kinds of consumption, reproductive and unproductive, the former alone adds to the national wealth. The latter impairs it. What is consumed for mere enjoyment is gone. What is consumed for reproduction leaves commodities of equal value, commonly with the addition of a profit. The usual effect of the attempt of government to encourage consumption is merely to prevent saving, that is, to promote unproductive consumption at the expense of productive and diminish the national wealth by the very means which were intended to increase it. What a country wants to make it richer is never consumption but production. Where there is the latter, we may be sure that there is no want of the former. To produce implies that the producer desires to consume. Why else should he give himself useless labor? He may not wish to consume what he himself produces, but his motive for producing and selling is the desire to buy. Therefore, if the producers generally produce and sell more and more, they certainly also buy more and more. Each may not want more of what he himself produces, but each wants more of what some other produces, and by producing what the other wants hopes to obtain what the other produces. There will never, therefore, be a greater quantity produced of commodities in general than there are consumers for. But there may be, and always are, abundance of persons who have the inclination to become consumers of some commodity, but are unable to satisfy their wish because they have not the means of producing, either that or anything to give in exchange for it. The legislator, therefore, needs not give himself any concern about consumption. There will always be consumption for everything which can be produced until the wants of all who possess the means of producing are completely satisfied, and then production will not increase any farther. The legislator has to look solely to two points, that no obstacle shall exist to prevent those who have the means of producing from enjoying those means as they find most for their interest, and that those who have not at present the means of producing to the extent of their desire to consume shall have every faculty afforded to their acquiring the means that, becoming producers, they may be enabled to consume. The general principles are now well understood by almost all who profess to have studied the subject, and are disputed by few except those who ostentatiously proclaim their contempt for such studies. We touch upon the question, not in the hope of rendering these fundamental truths clearer than they already are, but to perform a task so useful and needful that it is to be wished it were often redeemed part of the business of those who direct their assaults against ancient prejudices. Not of seeing that no scattered particles of important truth are buried and lost in the ruins of exploded error. Every prejudice which has long and extensively prevailed among the educated and intelligent must certainly be borne out by some strong appearance of evidence, and when it is found that the evidence does not prove the received conclusion, it is of the highest importance to see what it does prove. If this be thought not worth inquiring into, an error conformable to appearances is often merely exchanged for an error contrary to appearances, while even if the result be truth it is paradoxical truth and will have difficulty in obtaining credence while the false appearances remain. Let us therefore inquire into the nature of the appearances which gave rise to the belief that a great demand, a brisk circulation, a rapid consumption, three equivalent expressions are a cause of national prosperity. If every man produced for himself or with his capital employed others to produce everything which he required, customers and their wants would be a matter of profound indifference to him. He would be rich. If he had produced and stored up a large supply of the articles which he was likely to require and poor if he had stored up none at all, or not enough to last until he could produce more. The case, however, is different after the separation of employments. In civilized society a single producer confines himself to the production of one commodity or a small number of commodities, and his affluence depends not solely upon the quantity of his commodity which he has produced and laid in store, but upon his success in finding purchasers for that commodity. It is true, therefore, of every particular producer or dealer that a great demand, a brisk circulation, a rapid consumption of the commodities which he sells at his shop or produces in his manufactory is important to him. The dealer whose shop is crowded with customers who can dispose of a product almost the very moment it is completed makes large profit, while his next neighbor, with an equal capital but fewer customers, gains comparatively little. It was natural that, in this case, as a hundred others, the analogy of an individual should be unduly applied to a nation, as it has been concluded that a nation generally gains in wealth by the conquest of a province because an individual frequently does so by the acquisition of an estate, and as because an individual estimates his riches by the quantity of money which he can command, it was long deemed an excellent contrivance for enriching a country to heap up artificially the greatest possible quantity of precious metals within it. We examine then more closely than has usually been done the case from which the misleading analogy is drawn. Let us ascertain to what extent the two cases actually resemble. What is the explanation of the false appearance and the real nature of the phenomenon which being seen instinctively has led to a false conclusion? We shall propose for examination a very simple case, but the explanation of which will suffice to clear up all the other cases which fall within the same principle. Suppose that a number of foreigners with large incomes arrive in a country and there expend those incomes. Will this operation be beneficial as respects the national wealth to the country which receives these immigrants? Yes. Say many political economists. If they save any part of their incomes and employ them reproductively because then an addition is made to the national capital and the produce is a clear increase of the national wealth. But if the foreigner expands all his income unproductively, that is, no benefit to the country, say they, and for the following reason. If the foreigner has his income remitted to him in bread and beef, oats and shoes, and all the other articles which he has desirous to consume, it would not be pretended that his eating, drinking and wearing them on our shores rather than on his own could be of any advantage to us in point of wealth. Now the case is not different if his income is remitted to him in some commodity as, for instance, in money. For whatever takes place afterward with a view to the supply of his wants is a mere exchange of equivalence, and it is impossible that a person should ever be enriched by merely receiving an equal value in exchange for an equal value. When it is said that the purchases of the foreign consumer give employment to capital which would otherwise yield no profit to its owner, the same political economists reject this proposition as involving the fallacy of what has been called a general glut. They say that the capital which any person has chosen to produce and to accumulate can always find employment, since the fact that he has accumulated it proves that he had an unsatisfied desire, and if he cannot find anything to produce for the wants of other consumers he can for his own. It is impossible to contest these propositions as thus stated, but there is one consideration which clearly shows that there is something more in the matter than is taken here into account, and that is that the above reasoning tends distinctly to prove that it does a tradesman no good to go into his shop and buy his goods. How can he be enriched? It might be asked. He merely receives a certain value in money for an equivalent value in goods. Neither does this give employment to his capital, for there never exists more capital than can find employment, and if one person does not buy his goods another will, or if nobody does there is overproduction in that business. He can remove his capital and find employment in another trade. Everyone sees the fallacy of this reasoning as applied to individual producers. Everyone knows that as applied to them it has not even the semblance of plausibility that the wealth of a producer does in a great measure depend upon the number of his customers, and that in general every additional purchaser does really add to his profits. If the reasoning which would be so absurd if applied to individuals be applied to nations, the principle on which it rests must require much explanation and elucidation. Let us endeavor to analyze with precision the real nature of the advantage which a producer derives from an addition to the number of his customers. For this purpose it is necessary that we should premise a single observation on the meaning of the word capital. It is usually defined, the food, clothing, and other articles set aside for the consumption of the laborer, together with the materials and instruments of production. This definition appears to us perfectly liable to misapprehension, and much vagueness, that some narrow views have, we conceive, occasionally resulted from its being interpreted with too mechanical an adherence to the literal meaning of the words. The capital, whether of an individual or of a nation, consists, we apprehend, of all matters possessing exchangeable value, which the individual or the nation has in his or in its possession, for the purpose of reproduction, and not for the purpose of the owner's unproductive enjoyment. All unsold goods, therefore, constitute a part of the national capital, and of the capital of the producer or dealer to whom they belong. It is true that tools, materials, and the articles on which the laborer is supported are the only articles which are directly subservient to production, and if I have a capital consisting of money or of goods in a warehouse, I can only employ them as means of production, insofar as they are capable of being exchanged for the articles which conduce directly to that end. But the food, machinery, etc., which will ultimately be purchased with the goods in my warehouse, may at this moment not be in the country, may not be even in existence. If after having sold the goods, I hire laborers with the money, and set them to work, I am surely enjoying capital, though the corn, which in the form of bread, whose laborers may buy, with the money, may now be in a warehouse, at Danzig, or perhaps not even above ground. Whatever therefore is destined to be employed reproductively, either in its existing shape or indirectly by a previous, or even subsequent, exchange, is capital. Suppose that I have laid out all the money I possess in wages and tools, and that the article I produce is just completed in the interval which elapses before I can sell the article, realize the proceeds, and lay them out again in wages and tools. Will it be said that I have no capital? Certainly not. I have the same capital as before, perhaps a greater, but it is locked up, as the expression is, and not disposable. Whether we have thus seen accurately what really constitutes capital, it becomes obvious, that the capital of a country there is at all times a very large proportion lying idle. The annual produce of a country is never anything approaching in magnitude to what it might be if all the resources devoted to reproduction, if all the capital in short of the country, were in full employment. If every commodity on an average remained unsold, for a length of time equal to that required for its production, it is obvious that at any one time no more than half the productive capital of the country would be really performing the functions of capital. The two halves would relieve one another, like the semi-quoy in a Greek tragedy, or rather the half which is in employment, would be a functioning person, composed of varying parts, but the result would be that each producer would be able to produce every year only half as large a supply of the commodities as he could produce if he were sure of selling them the moment the production was completed. This, or something like it, however, the habitual state, at every instance, of a very large proportion of all the capitalists in the world. The number of producers or dealers who turn over their capital, as the expression is, in the shortest possible time, is very small. There are few who have so rapid a sale of their wares that all the goods which their own capital, or the capital which they can borrow, enables them to supply, are carried off as fast as can be supplied. The majority have not an extent of business at all adequate to the amount of the capital they dispose of. It is true that, in the communities in which industry and commerce are practiced with greatest success, the contrivances of banking enabling the possessor of a larger capital than he can employ in his own business to employ it productively and derive a revenue from it notwithstanding. Yet, even then, there is, of necessity, a great quantity of capital which remains fixed in the shape of implements, machinery, buildings, etc., whether it is only half-employed or in complete employment and every dealer keeps a stockpile in trade to be ready for a possible sudden demand, though he probably may not be able to dispose of it for an indefinite period. The perpetual non-employment of a large portion of capital is the price we pay for the division of labor. The purchase is worth what it costs, but the price is considerable. Of the importance of the fact which has just been noticed there are three significant proofs. One is the larger sum often given for the goodwill of a particular business. Another is the larger rent which is paid for shops in certain situations, near a great thoroughfare, for example, which have no advantage except that the occupier may expect a large body of customers and be enabled to turn over his capital more quickly. Another is that in many trades there are some dealers who sell articles of an equal quality at a lower price than other dealers. Of course, this is not a voluntary sacrifice of profits. They expect by a consequent overflow of customers to turn over their capital more quickly and to be gainers by keeping the whole of their capital in most constant employment, though on any given operation their gains are less. Reasoning cited in the earlier part of this paper to show the usefulness of a mere purchaser or customer for enriching a nation of an individual applies only to the cases of dealers who have already as much business as their capital admits of, and as rapid a sale for their commodities as is possible. To such dealers an additional purchase is really of no use, for they are sure of selling all their commodities the moment those commodities are on sale. It is of no consequence whether they sell them to one person or to another, but it is questionable whether there be any dealers in whose case this hypothesis is exactly verified, and to the great majority it is not applicable at all. An additional customer, to most dealers, is equivalent to an increase of their productive capital. He enables them to convert a portion of their capital, which was lying idle, and which could never have been productive in their hands until a customer was found, into wages and instruments of production, and if we suppose that the commodity, unless what by him would not have found a purchaser for a year after, then all which a capital of that value can enable men to produce during a year is clear gain, gain to the dealer or producer, and to the laborers whom he will employ, and thus if no one sustains any corresponding loss, gain to the nation. The aggregate produce of the country for the succeeding year is, therefore, increased, not by the mere exchange, but by calling into activity a portion of the national capital which had it not been for the exchange would have remained for some time longer unemployed. Thus there are actually at all times producers and dealers of all or nearly all classes whose capital is lying partially idle because they have not found the means of fulfilling the conditions which the division of labor renders indispensable to the full employment of capital, viz that of exchanging their products with each other. If these persons could find one another out, they could mutually relieve each other from this disadvantage. Any two shopkeepers in insufficient employment who agreed to deal at each other's shops so long as they could their purchase articles of as good a quality as elsewhere and as low a price would render the nation a service. It may be said that they must previously have dealt to the same amount with some other dealers, but this is erroneous, since they could only have obtained the means of purchasing by being previously enabled to sell. By their compact each would gain a customer who would call his capital into fuller employment. Each therefore would obtain an increased produce and they would thus be enabled to become better customers to each other than they could be to third parties. It is obvious that every dealer who has not business sufficient fully to employ his capital, which is the case with all dealers when they commence business and with many to the end of their lives, is in the predicament simply for want of someone with whom to exchange his commodities. And as there are such persons to about the same degree probably in all trades, it is evident that if these persons sought one another out they have their remedy in their own hands and by each other's assistance might bring their capital into more full employment. We are now qualified to define the exact nature of the benefits which a producer or dealer derives from the acquisition of a new customer. It is as follows. 1. If any part of his own capital was locked up in the form of unsold goods producing for a longer period or a shorter nothing at all, a portion of this is called into greater activity and becomes more consistently productive. But to this we must add some further advantages. 2. If the additional demand exceeded what can be supplied by sending at liberty the capital which exists in the state of unsold goods and if the dealer has additional resources which were productively invested in the public funds for instance, but not in his own trade, he is enabled to obtain on a portion of these not mere interest but profits and so to gain that difference between the rate of profit and the rate of interest which may be considered as wages of superintendents. 3. If all the dealer's capital is employed in his own trade and no part of it locked up as unsold goods, the new demand affords him additional encouragement to save by enabling his savings to yield him not merely interest but profit. If he does not choose to save or until he shall have saved it enables him to carry on an additional business with borrowed capital and so gain the difference between interest and profit or in other words to receive wages of superintendents on a larger amount of capital. This it will be found is a complete account of all the gains which a dealer in any commodity can derive from an accession to the number of those who deal with him and it is evident to everyone that these advantages are real and important and that they are the cause which induces a dealer of any kind to desire an increase of his business. It follows from these premises that the arrival of a new unproductive consumer living on his own means in any place be that place a village, a town, or an entire country is beneficial to that place if it causes to any of the dealers of the place any of the advantages above enumerated without withdrawing an equal advantage of the same kind from any other dealer of the same place. End of Part 1 of Essay 2. This accordingly is the test by which we must try all such questions and by which the propriety of the analogical argument from dealing with the tradesmen to dealing with the nation must be decided. Let us take for instance as our sample Paris which is much frequented by strangers from various parts of the world who as sojourners there live unproductively upon their means. Let us consider whether the presence of these persons is beneficial in an industrial point of view to Paris. We exclude from the consideration that portion of the strangers incomes which they pay to natives as direct renumeration for service or labor of any description. This is obviously beneficial to the country. An increase in the funds expended in employing labor whether that labor be productive or unproductive tends equally to raise wages. The condition of the whole laboring class is so far benefited. It is true that the laborers thus employed by sojourners are probably in part or altogether withdrawn from productive employment, but this is far from being an evil for either the situation of the laboring class is improved, which is far more than an equivalent for a diminution in mere production, where the rise of wages acts as a stimulus to population and then the number of productive laborers becomes as great as before. To this we may add that what the sojourners pay as wages of labor or service, whether constant or casual, though expended unproductively by the first possessor, may, when it passes into the hands of the receiver, be by them saved and invested in a productive employment. If so, a direct addition is made to the national capital. All this is obvious, and is sufficiently allowed by political economists, who have invariably set apart the gains of all persons coming under the class of domestic servants as real advantages arising to a place from the residence there of an increased number of unproductive consumers. We have only to examine whether the purchases of commodities by these unproductive consumers confer the same kind of benefit on the village, town, or nation which is bestowed on a particular tradesman by dealing at his shop. Now it is obvious that the sojourners on their arrival confer the benefiting question upon some dealers who did not employ it before. They purchase their food and many other articles from the dealers in the place. They therefore call the capital of some dealers, which was locked up in unsold goods, into more active employment. They encourage them to save and enable them to receive wages of superintendents upon a large amount of capital. These effects being undeniable, the question is whether the presence of the sojourners deprives any other of the Paris dealers of a similar advantage. It will be seen that it does, and nothing will then remain but a comparison of the amounts. It is obvious to all who reflect and was shown in the paper which proceeds this, that the remittances to persons who expend their incomes in foreign countries are, after a slight passage of the precious metals, defrayed in commodities, and that the result commonly is an increase of exports and a diminution of imports until the latter fall short of the former by the amount of the remittances. The arrival, therefore, of the strangers, say from England, while it creates at Paris a market for commodities equivalent in value to their funds, displaces in the market other commodities to an equal value. To the extent of the increase of exports from England into France in the way of remittance, it introduces additional commodities which, by their cheapness, displace others formerly produced in that country. To the extent of the diminution of imports into England from France, commodities which existed or which were habitually produced in that country are deprived of a market and can only find one at a price not sufficient to defray the cost. It must therefore be a matter of mere accident if, by arriving in a place, the new unproductive consumer causes any net advantage to its industry of the kind which we are now examining. Not to mention that this, like any other change in the channels of trade, may render useless a portion of fixed capital and so far injure the national wealth. A distinction, however, must be made. The place to which the new unproductive consumers have come may be a town or village, as well as a country. If a town or village, it may either be or not be a place having an export trade. If the place had no previous trade, except with the immediate neighborhood, there are no exports and imports by the new arrangement of which the remittance can be made. There is no capital formerly employed in manufacturing for the foreign market, which is now brought into less full employment. Yet the remittance, evidently, is still made in commodities, but in this case without displacing any which were produced before. To show this, it is necessary to make the following remarks. The reason why towns exist is that, center's paribus, it is convenient in order to save cost of carriage, that the production of commodities should take place as far as practicable in the immediate vicinity of the consumer. Capital finds its way so easily from town to country and from country to town that the amount of capital in the town will be regulated wholly by the amount which can be employed there more conveniently than elsewhere. Consequently, the capital of a place will be such as is sufficient. First, to produce all commodities from which local circumstances can be produced there at less cost than elsewhere. And if this be the case to any great extent, it will be an exploring town. When we say produced, we may add or stored. Second, to produce and retail the commodities which are consumed by the inhabitants of the town and the place of whose production is in other aspects a matter of indifference. To the inhabitants of the town must be added such dwellers in the adjoining country as are nearer to that place than to any other equally furnished market. Now, if new unproductive consumers resort to the place, it is clear that for the latter of these two purposes more capital will be required than before. Consequently, if less is not required for the former purpose, more capital will establish itself at the place. Until this additional capital has arrived, the producers and dealers already on the spot will enjoy great advantages. Every particle of their own capital will be called into the most active employment. What their capital does not enable them to supply will be got from others at a distance who cannot supply it on such favorable terms. Consequently, they will be in the predicament of possessing a partial monopoly. Receiving for everything a price regulated by a higher cost of production than they are compelled to pay. They also being in possession of the market will be enabled to make a large portion of the new capital pass through their hands and thus to earn wages of superintendents upon it. If indeed the place from whence the strangers came previously traded with that where they have taken up their abode, the effect of their arrival is that the exports of the town will diminish and that it will be supplied from abroad with something which it previously produced at home. In this way, an amount of capital will be set free equal to that required and there will be no increase on the whole. The removal of the court from London to Birmingham would not necessarily, though it would probably, increase the amount of capital in the latter place. Begin footnote. Probably, because most articles of an ornamental description being still required from the same makers, these makers with their capital would probably follow their customers. Besides, from place to place within the same country, most persons would rather change their habituation than their employment. But the moving on this score would be reciprocal. End footnote. The influx of money to Birmingham and its efflux from London would render it cheaper to make some articles in London for Birmingham consumption and to make others in London for home consumption which were formally bought from Birmingham. But instead of Birmingham, an exporting town, suppose a village or a town which only produced and retailed for itself and its immediate vicinity. The remittances must come hither in the shape of money and though the money would not remain, it would be sent away in exchange for commodities. It would, however, first pass through the hands of the producers and dealers in the place and would by them be exported in exchange for the articles which they require. These, the materials, tools, and substance necessary for the increased production now required of them and articles of foreign luxury for their own increased unproductive consumption. These articles would not displace any formerly made in the place, but on the contrary, would forward the production of more. Hence, we may consider the following propositions as established. 1. The expenditure of absentees in the case of domestic servants accepted is not necessarily any loss to the country which they leave or gain to the country which they resort to save in the manner shown in Essay 1. For almost every country habitually exports and imports to a much greater value than the incomes of its absentees or of the foreign sojourners within it. 2. But sojourners often do much good to the town or village which they resort to and absentees harm to that which they leave. The capital of the petty tradesmen in a small town near an absentee's estate is deprived of the market for which it is conveniently situated and must resort to another to which other capitals lie nearer and where it is consequently outbid and gains less obtaining only the same price with greater expense. But this evil would be equally occasioned if, instead of going abroad, the absentee had removed to his own capital city. If the tradesmen could, in the latter case, move to the metropolis or in the former, employ himself in producing increased exports or in producing for home consumption articles which now no longer imported each in the place most convenient for that operation, he would not be a loser, though the place which he was obliged to leave might be said to lose. Paris undoubtedly gains much by the sojourn of foreigners, while the counteracting loss by diminution of exports from France is suffered by the great trading and manufacturing towns, Rouen, Bordeaux, Lyon, etc., which also suffer the principal part of the loss by importation of articles previously produced at home. The capital thus, set free, finds its most convenient seat to be Paris. Since the business to which it must turn is the production of articles to be unproductively consumed by the sojourners, the great trading towns of France would undoubtedly be more flourishing if France were not frequented by foreigners. Roman Naples are perhaps purely benefited by the foreigner's sojourning there, for they have so little external trade that their case may resemble that of the village in our hypothesis. Absenteeism, therefore, except as shown in the first essay, is a local, not a national evil, and the resort of foreigners insofar as they purchase for unproductive consumption is not, in any commercial country, a national, though it may be a local good. From the considerations which we have now adduced, it is obvious what is meant by such phrases as brisk demand and a rapid circulation. There is a brisk demand and a rapid circulation when goods, generally speaking, are sold as fast as they can be produced. There is slackness, on the contrary, and stagnation, when goods which have been produced remain for a long time unsold. In the former case, the capital which has been locked up in production is disengaged as soon as the production is completed, and can be immediately employed in further production. In the latter case, a large portion of the productive capital of the country is lying in temporary inactivity. From what has been already said, it is obvious that periods of brisk demand are also the periods of greatest production, the national capital is never called into full employment at those periods. This, however, is no reason for desiring such times. It is not desirable that the whole capital of a country should be in full employment. For the calculations of producers and traders being of necessity imperfect, there are always some commodities which are more or less in excess, as there are always some which are in deficiency. If, therefore, the whole truth were known, there would always be some classes of producers contracting, not extending their operation. If all are endeavoring to extend them, it is a certain proof that some general delusion is afloat. The commonest cause of such delusion is some general, or very extensive, rise of prices, whether caused by speculation or by currency, which persuades all dealers that they are growing rich, and hence an increase of production really takes place during the progress of depreciation. As long as the existence of depreciation is not suspected, and it is this which gives to the facilities of the currency school principally represented by Mr. Etwood, all the little plausibility they possess. But when the delusion vanishes and the truth is disclosed, those whose commodities are relatively in excess must diminish their production or be ruined, and if during the high prices they have built mills and erected machinery, they will be likely to repent at leisure. At the present state of the commercial world, mercantile transactions being carried on upon an immense scale, but the remote causes of fluctuations in prices being very little understood, so that unreasonable hopes and unreasonable fears alternately rule with tyrannical sway over the minds of a majority of the mercantile public. General eagerness to buy and general reluctance to buy succeed one another in a manner more or less marked at brief intervals. Except during short periods of transition, there is almost always either a great briskness of business or a great stagnation. Either the principal producers of almost all the leading articles of industry have as many orders as they can possibly execute, or the dealers in almost all commodities have their warehouses full of unsold goods. In this last case, it is commonly said that there is general superabundance, and as those economists who have contested the possibility of general superabundance would none of them deny the possibility or even the frequent occurrence of the phenomenon which we have just noticed. It would seem incumbent upon them to show that the expression to which they object is not applicable to a state of things in which all or most commodities remain unsold, in the same sense in which there is said to be a superabundance of any one commodity when it remains in the warehouses of dealers from want of a market. This is merely a question of naming, but an important one, as it seems to us that each apparent difference of opinion has been produced by a mere difference in the mode of describing the same facts, and the persons who at the bottom were perfectly agreed have considered each other as guilty of gross error and sometimes over misrepresentation on this subject in order to afford the explanations with which it is necessary to take the doctrine of the impossibility of an excess of all commodities. We must avert for a moment to the argument by which this impossibility is commonly maintained. There can never, it is said, be want of buyers for all commodities, because whoever offers a commodity for sale desires to obtain a commodity in exchange for it, and therefore a buyer by the mere fact of his being a seller. The sellers and the buyers for all commodities taken together must, by the metaphysical necessity of the case, be an exact equipus to each other, and if there be more sellers than buyers of one thing, there must be more buyers than sellers of another. The argument is evidently founded on the supposition of a state of barter, and on that supposition it is perfectly incontestable. When two persons perform an act of barter, each of them is at once a seller and a buyer. He cannot sell without buying, unless he chooses to buy some other person's commodity, but he does not sell his own. If, however, we suppose that money is used, these propositions cease to be exactly true. It must be admitted that no person desires money for its own sake, unless some very rare cases of misers be an exception, and that he who sells his commodity, receiving money in exchange, does so with the intention of buying with that same money some other commodity. Interchange by means of money is therefore, as has been observed, ultimately nothing but barter. But there is this difference, that in the case of barter, the selling and the buying are simultaneously confounded in one operation. You sell what you have, and buy what you want, buy one indivisible act, and you cannot do the one without doing the other. Now the effect of the employment of money, and even the utility of it, is that it enables this one act of interchange to be diverted into two separate acts or operations, one of which may be performed now, and the other a year hence, or whenever it shall be most convenient. Although he who sells really sells only to buy, he needs not buy at the same moment when he sells, and he does not therefore necessarily add to the immediate demand for one commodity when he adds to the supply of another. The buying and selling being now separated, it may very well occur that there may be at some given time a very general inclination to sell with as little delay as possible accompanied with an equally general inclination to defer all purchases as long as possible. This is always actually the case in those periods which are described as periods of general excess, and no one, after sufficient explanation, will contest the possibility of general excess in this sense of the word. The state of things which we have just described, and which is of no uncommon occurrence amounts to it. For when there is a general anxiety to sell, and a general disinclination to buy, commodities of all kinds remain for a long time unsold, and those which find an immediate market do so at a very low price, and if it be said that when all commodities fall in price, the fall is of no consequence, since mere money price is not material, while the relative value of all commodities remains the same. We answer that this would be true if the low prices were to last forever, but as it is certain that prices will rise again sooner or later, the person who is obliged by necessity to sell his commodity at a low money price is really a sufferer, the money he receives sinking shortly into its ordinary value. Every person, therefore, delays selling if he can, keeping his capital unproductive in the meantime, and sustaining the consequent loss of interest. There is stagnation to those who are not obliged to sell, and distress to those who are. It is true that this state can be only temporary, and must even be succeeded by a reaction of corresponding violence, since those who have sold without buying will certainly buy at last, and there will be more buyers than sellers. But although the general oversupply is of necessity only temporary, this is no more than may be said of every partial oversupply. An overstocked state of the market is always temporary, and is generally followed by a more than common briskness of demand. In order to render the argument for the impossibility of an excess of all commodities, applicable to the case in which a circulating medium is employed, money must itself be considered as a commodity. It must undoubtedly be admitted that there cannot be an excess of all other commodities, and an excess of money, at the same time. But those who have, at periods which we have described, affirmed that there was an excess of all commodities, never pretended that money was one of these commodities. They held that there was not an excess, but a deficiency of the circulating medium. What they called a general superabundance was not a superabundance of commodities, relatively to commodities, but a superabundance of all commodities, relatively to money. What it amounted to was that persons in general at that particular time, from a general expectation of being called upon to meet sudden demands, liked better to possess money than any other commodity. Money, consequently, was in request, and all other commodities, in comparison, disrepute. In extreme cases, money is collected in masses, and hoarded in the milder cases, people merely defer parting with their money, or come under any new arrangements to part with it. But the result is that all commodities fall in price or become unsalable. When this happens, to one single commodity, there is said to be a superabundance of that commodity. And if that be a proper expression, there would seem to be, in the nature of the case, no particular impropriety in saying that there is a superabundance of all or most commodities, when all or most of them are in this same predicament. It is, however, of the utmost importance to observe that excess of all commodities, in the only sense in which it is possible, means only a temporary fall in their value relative to money. To suppose that the markets for all commodities could, at any other sense than this, be overstocked, involves the absurdity that commodities may fall in value relatively to themselves, or that of two commodities each can fall relatively to the other, a becoming equivalent to b minus x, and b to a minus x at the same time. It is perhaps a sufficient reason for not using phrases of this description that they suggest the idea of excessive production. A want of market for one article may arise from excessive production of that article, but when commodities in general become unsalable, it is from a very different cause. There cannot be excess production of commodities in general. The argument against the possibility of general overproduction is quite conclusive, so far as it applies to the doctrine that a country may accumulate capital too fast, that produce in general may, by increasing faster than a demand for it, reduce all producers to distress. This proposition, strange to say, was almost received doctrine as lately as 30 years ago, and the merit of those who have explored it is much greater than might be inferred from the extreme obviousness of its absurdity when it is stated in its native simplicity. It is true that if all the wants of all the inhabitants of a country were fully satisfied, no further capital should find useful employment, but in that case none would be accumulated, so long as there remain any persons not possessed. We do not say of subsistence, but of most refined luxuries, and who would work to possess them. There is employment for capital, and if the commodities which these persons want are not produced and placed at their disposal, it can only be because capital does not exist. Disposal for the purpose of employing, if not any other laborers, those very laborers themselves, in producing the articles for their own consumption. Nothing can be more chimerical than the fear that the accumulation of capital should produce poverty and not wealth, or that it will ever take place too fast for its own end. Nothing is more true that it is produce which constitutes the market for produce, and that every increase of production, if distributed without miscalculation among all kinds of produce in the proportion which private interests would dictate, creates, or rather constitutes, its own demand. This is the truth which the deniers of general overproduction have seized and enforced, nor has it pretended that anything has been added to it or subtracted from it in the present disquitation. But it is thought that those who receive the doctrine, accompanied with the explanations which we have given, will understand more clearly than before what is and what is not implied in it. And we will see, when properly understood, it in no way contradicts those obvious facts which are universally known and attributed to be not only of possible, but of actual and even frequent occurrence. The doctrine in question only appears a paradox, because it is usually been so expressed as apparently to contradict these well-known facts, which, however, equally well known to the authors of the doctrine, who themselves can only have adopted from inadvertence any form of expression which could, to a candid person, appear inconsistent with it. The essentials of the doctrine are preserved when it is allowed that there cannot be permanent excess of production or of accumulation, though it be at the same time admitted that there may be a temporary excess of any one article considered separately. So may there of commodities generally, not inconsequensive overproduction, but of want of a commercial confidence. End of Part 2 of Essay 2 Essay is on some unsettled questions of political economy. Essay Number 3 This is the LibriVox recording. All LibriVox recordings are in the public domain. For more information or to volunteer, please visit LibriVox.org. Some essays on unsettled questions of political economy by John Stuart Mill. Essay Number 3 On the Words Productive and Unproductive It would probably be difficult to point out any two words respecting the proper use of which political economists have been more divided than they have been concerning the two words productive and unproductive, whether considered as applied to labor, to consumption, or to expenditure. Although this is a question solely of nomenclature, it is one of significant importance to be worth another attempt to settle it satisfactorily. For although writers on political economy have not agreed in the ideas which they were accustomed to annex to these terms, the terms have generally been employed to denote ideas of very great importance, and it is impossible that some vagueness should not have been thrown upon the ideas themselves by looseness in the use of the words by which they are habitually designated. Further, so long as the pedantic objection to the introduction of new technical terms continues, accurate thinkers on moral and political subjects are limited to a very scanty vocabulary for the expression of their ideas. It therefore is of great importance that the words with which mankind are familiar should be turned to the greatest possible advantage as instruments of thought, and that one word should not be used as the sign of an idea which is already sufficiently expressed in another word, and that words which are required to denote ideas of great importance should not be usurped for the expression of such as are comparatively significant. The phrases productive labor and productive consumption have been employed by some writers on political economy with very great latitude. They have considered, and classed, as productive labor and productive consumption, all labor which serves any useful purpose, all consumption which is not waste. Mr. McCullough has asserted, totem verbius, that the labor of Madame Pasta was as well entitled to be called productive labor as that of a cotton spinner. Employed in this sense, the words productive and unproductive are superfluorious. Once the words useful and agreeable on the one hand, useless and worthless on the other, are quite sufficient to express all the ideas to which the words productive and unproductive are here applied. The use of the terms therefore is subversive of the ends of language. Those writers who have employed the words in a more limited sense have usually understood by productive or unproductive labor, labor which is productive of wealth or unproductive of wealth. But what is wealth? And here the words productive and unproductive have been affected with additional ambiguities corresponding to the different extensions which different writers have given to the term wealth. Some have given the name of wealth to all things which tend to the use or enjoyment of mankind and which possess exchangeable value. This last clause is added to exclude air, the light of the sun, and other things which can be obtained in unlimited quantity without labor or sacrifice, together with all such things as, though produced by labor, are not held in sufficient general estimation to command any price in the market. But when the definition came to be explained, many persons were disposed to interpret all things which tend to have use or enjoyment of man as implying only all material things. Immaterial products they refuse to consider as wealth, and labor, or expenditure which yielded nothing but immaterial projects, they characterized as unproductive labor and unproductive expenditure. To this it was, or might have been, answered that according to this classification, a carpenter's labor at his trade is productive labor, but the same individual's labor in learning his trade was unproductive labor. Yet it is obvious that, on both occasions, his labor tended exclusively to what is allowed to be production. The one was equally indispensable with the other. To the ultimate result, further, if we adopted the above definition, we should be obliged to say that a nation whose artisans were twice as skillful as those of another nation was not, setter as paribus, more wealthy. Although it is evident that every one of the results of wealth, and everything for the sake of which wealth is desired, would be possessed by the former country in a higher degree than by the latter. Every classification according to which a basket of cherries gathered and eaten the next minute are called wealth, while that title is denied to the acquired skill of those who are acknowledged to be productive laborers, is a purely arbitrary division, and does not conduce to the ends for which classification and nomenclature are designed. In order to get over all difficulties, some political economists have disposed to make the terms express a distinction sufficiently definite indeed, but more completely arbitrary, and having less foundation in nature than any of the former. This will not allow for any labor or any expenditure the name of productive, unless the produce which it yields returns into the hands of the very person who made the outlay. Hedging and ditching they term productive labor, though these operations conduce to production only indirectly by protecting the produce from destruction. But the necessary expenses incurred by a government for the protection of property are, they insist upon it, consumed unproductively. Though it has been well pointed out by Mr. McCullough, these expenses in their relation to the national wealth are exactly analog to the wages of a hedger or a ditcher. The only difference is that the farmer who pays for the hedging and ditching is the person to whom the consequent increase of production occurs, while the government, which is at the expense of police officers and courts of justice, does not as a necessary consequence get back into its own coffers the increase of the national wealth resulting from the security of property. It would be endless to point out the oddities and incongruities which result from this classification, whether we take the words wealth and production in the largest or in the most restricted sense, in which they have yet been employed, nobody will dispute that roads, bridges, and canals contribute to an eminent degree, and in a very direct manner, to the increase of production and wealth. The labor and cuneary resources employed in these constructions would, according to the above theory, be considered productive if every occupant of the land were compelled by law to construct so much of the road or canal as passes through his own farm. If instead of this, the government makes the road and throws it open to the public toll-free, the labor and expenditure would be, on the above system, clearly unproductive. But if the government or an association of individuals made the road and imposed a toll to defray the expense, we do not see how these writers could refuse to the outlay the title of productive expenditure. It would follow that the very same labor and expense, if given gratuitously, must be called unproductive, which, if a charge had been made for it, it would have been called productive. When these consequences of the purely arbitrary classification to which we allude have been pointed out and complained of, the only answer which we have ever seen made to the objection is that the line of demarcation must be drawn somewhere, and that in every classification there are intermediate cases which might have been included with almost equal propriety, either in one class or in the other. The answer appears to us to indicate the want of a sufficiently accurate and discriminating perception. What is the kind of inaccuracy which generally cannot be avoided in a classification, and what is the other kind of accuracy from which it always may be and should be exempt? The classes themselves may be, mentally speaking, perfectly definite, though it may not always be easy to say which of them a particular object belongs. When it is certain in which of the two classes an object should be placed, if the classification be properly made and properly expressed, the uncertainty can turn only upon a matter of fact. It is uncertain to which class the object belongs, because it is doubtful whether it possesses, in a greater degree, the characteristics of the one class or those of the other. But the characteristics themselves may be defined and distinguished with the nicest exactness, and always ought to be so, especially ought they in a case like the present, because there is only the distinction between the ideas which is of any importance, that we should be able with ease to portion out all employment between the two classes does not happen to be of any particular consequence. It is frequently said that classification is a mere affair of convenience. This assertion is true in one sense, but not if its meaning be, that the most proper classification is that in which it is easiest to say whether an object belongs to one class or another. The use of classification is to fix attention upon the distinctions which exist among things, and that is the best classification, which is found upon the most important distinctions, whether be the facilities which it may afford of ticketing and arranging the different objects which exist in nature. In fixing therefore the meaning of the words productive and unproductive, we ought to endeavor to render them significant of the most important distinctions which, without too glaring of violation of received usage, they can be made to express. We ought therefore, when we are restricted to the employment of old words, to endeavor as far as possible that it shall be necessary to struggle against the old associations with those words. We should, if possible, give the words such a meaning that the propositions in which people are accustomed to use them shall, as far as possible, still be true, and that the feelings habitually excited by them shall be such as the things to which we mean to appropriate them ought to excite. We shall endeavor to unite these conditions in the result of the following inquiry. In whatever manner political economists may have settled the definition of productive and inproductive labor or consumption, the consequences which they have drawn from the definition are nearly the same. In proportion to the amount of the productive labor and consumption of a country, the country they all allow is enriched in proportion to the amount of the unproductive labor and consumption, the country is impoverished. Productive expenditure they are accustomed to view as a gain. Unproductive expenditure, however useful, has a sacrifice. Unproductive expenditure of what was desired to be expended productively, they always characterize as a squandering of resources and call it profusion and prodigality. The productive expenditure of that which ought, without enroaching upon capital, be expended unproductively is called saving, economy, frugality, want, misery, and starvation are described as the lot of a nation which annually employs less and less of its labor and resources in production, growing comfort and opulence as the result of an annual increase in the quality of wealth so employed. Let us then examine what qualifies as expenditure and in the employment of labor are those from which all the consequences above mentioned really flow. The end to which all labor and all expenditure are directed is twofold. Sometimes it is enjoyment immediately, the fulfillment of those desires, the gratification of which is wished for on its own account. Whether labor or expense is not incurred immediately for the sake of enjoyment and is yet not absolutely wanted, it must be incurred for the purpose of enjoyment indirectly or immediately by either repairing and perpetuating or adding to the permanent source of enjoyment. Sources of enjoyment may be accumulated and stored up. Enjoyment itself cannot. The wealth of a country consists of the sum total of the permanent sources of enjoyment, whether material or immaterial contained in it, and labor or the expenditure which tends to augment or to keep up these permanent sources should, we conceive, be termed productive. Labor which is employed for the purpose of directly affording enjoyment, such as the labor of a performer or a musical instrument, we term unproductive labor. Whatever is consumed by such a performer we consider as unproductively consumed. The accumulated total of the source of enjoyment, which the nation possessed, is diminished by the amount of what he has consumed. Whereas if it had been given to him in exchange for his services in producing food or clothing, the total of the permanent source of enjoyment in the country might have not diminished but increased. The performer on the musical instrument then is, so far as respects that act, not a productive but an unproductive laborer. But what shall we say of the workman who made the musical instrument? He, most persons would say, is a productive laborer and with reason, because the musical instrument is a permanent source of enjoyment, which does not begin and end with the enjoying, and therefore admits of being accumulated. But the skill of the musician is a permanent source of enjoyment, as well as the instrument which he plays upon, and although skill is not a material object, but a quality of an object, fees of the hands and minds of the performer. Nevertheless, skill possesses exchangeable value, is acquired by labor and capital, and is capable of being stored and accumulated. Skill therefore must be considered as wealth, and the labor and funds employed in acquiring skill in anything tending to the advantage or pleasure of mankind, must be considered to be productively employed and expended. The skill of a productive laborer is analogous to the machinery he works on. Neither of them is enjoyment nor conduces directly to it, but both induce indirectly to it, and both in the same way, if a spinning Jenny be wealth, the spinner's skill is also wealth. If the mechanic who made the spinning Jenny labored productively, the spinner also labored productively when he was learning his trade, and what they both consumed was consumed productively. That is to say, its consumption did not tend to diminish, but to increase the sum of the permanent sources of enjoyment in the country, by affecting a new creation of those sources more than equal to the amount of the consumption. The skill of a tailor and the implements he employs contribute in the same way to the convenience of him who wears the coat, namely a remote way it is the coat itself, which continues immediately. The skill of Madame Pasta and the building and decorations which aid the effect of her performance contribute in the same way to the enjoyment of the audience, namely an immediate way without any intermediate instrumentality. The building and decorations are consumed unproductively, and Madame Pasta labors and consumes unproductively. For the building is used and worn out, and Madame Pasta performs immediately for the spectator's enjoyment, and without leaving as a consequence of the performance any permanent result possessing exchangeable value. Consequently, the epithet unproductive must be equally applied to the gradual wearing out of the bricks and mortar, the nightly consumption of the more perishable properties of the theater, the labor of Madame Pasta in acting, and of the orchestra in playing. But notwithstanding that, the architect who built the theater was a productive laborer. So were the producers of the perishable articles, so were those who constructed the musical instruments, and so we must be permitted to add, were those who instructed the musicians, and all persons who, by the instructions which they may have given to Madame Pasta, contributed to the formation of her talent. All these persons contributed to the enjoyment of the audience in the same way, and that a remote way, these by the production of a permanent source of enjoyment. The difference between this case and the case of the cotton spinner already adverted to is this. The spinning journey and the skill of the cotton spinner are not only the result of productive labor, but are themselves productively consumed. The musical instrument and the skill of the musician are equally the result of productive labor, but are themselves unproductively consumed. Let us now consider what kinds of labor, and of consumption or expenditure, will be classified as productive and what as unproductive according to this rule. The following are always productive. Labor and expenditure of which the direct object or effect is the creation of some material product useful or agreeable to mankind. Labor and expenditure of which the direct effect and objects are to endow human or other animated beings with facilities or qualities useful or agreeable to mankind and possessing exchangeable value. Labor and expenditure which without having for their direct object the creation of any useful material product or bodily or mental facility or quality yet tend indirectly to promote one or the other of those ends and are exerted or incurred solely for that purpose. Following are largely productive and partly unproductive and cannot with propriety be ranged decidedly with either class. Labor or expenditure which does indeed create or promote to creation of some useful material product or bodily or mental faculty or quality but which is not incurred or exerted for that soul end having also for another and perhaps its principal and enjoyment or the promotion of enjoyment. Such are the labor of the judges, the legislator, the police officer, the soldier, and the expenditure incurred for their support. These functionaries protect and secure mankind in the exclusive possession of such material products or acquired facilities as belong to them and by the security which they so confer they indirectly increase production to a degree far more than equivalent to the expense which is necessary for their maintenance. But this is not the only purpose for which they exist. They protect mankind not merely in the possession of their permanent resources but also in the actual enjoyments and so far although highly useful they cannot conformitably to the distinction which we have attempted to lay down be considered productive laborers. Such also are the labor and wages of domestic servants. Such persons are entertained mainly as subservient to mere enjoyment but most of them occasionally and some habitually render services which must be considered as of a productive nature such as that of cookery the last stage at the manufacture of food or gardening a branch of agriculture the following are wholly unproductive labor exerted and expenditure incurred directly and exclusively for the purpose of enjoyment and not calling into existence anything whether substance or quality but such as begins and perishes in the enjoyment labor exerted and expenditure incurred uselessly or in pure waste and yielding neither direct enjoyment nor permanent sources of enjoyment it may be objected that expenditure incurred even for pure enjoyment promotes production indirectly by inciting to exertion thus the view of the splendor of a rich establishment is supposed by some writers to produce upon the mind of an indigent spectator an earnest desire of enjoyment of the same luxuries and a consequent purpose of working with vigor and diligence and saving from his earnings thus increasing the productive capital of the country it is true that mankind are for the most part excited to productive industry solely by the desire of subsequently consuming the result of their labor and accumulation the consumption called unproductive these that of which the direct result is enjoyment is in reality the end to which production is only the means a desire for the end is what alone impels anyone to have recourse to the means but not withstanding this it is of the greatest importance to mark the distinction between the labor and the consumption which have been enjoyed for their immediate end and the labor and the consumption for which the immediate end is reproduction though the site of the former may still further stimulate that degree for the enjoyment afforded by wealth which the mere knowledge without the immediate view which suffice to excite and without dwelling on that consideration that the example of a large expenditure excites one individual to accumulation it encourages to essays on some unsettled questions of political economy essay number four part two this is a LibriVox recording all LibriVox recordings are in the public domain for more information or to volunteer please visit LibriVox.org essays on some unsettled questions of political economy by John Stuart Mill essay number four on profits and interest part one the profits of stock are the surplus which remains to the capitalist after replacing his capital and the ratio which that surplus bears to the capital itself is the rate of profit this being the definition of profits it might seem natural to adopt as a sufficient theory in regard to the rate of profit that it depends upon the productive power of capital some countries are favored beyond others either by nature or art in the means of production if the powers of the soil or of machinery enable capital to produce what is necessary for replacing itself and twenty percent more profits will be twenty percent and so on this accordingly is a popular mode of speaking on the subject of profits but it has only the semblance not the reality of an explanation the productive power of capital through a common and for some purposes a convenient expression is a delusive one capital strictly speaking has no productive power the only productive power is that of labor assisted no doubt by tools and acting upon materials that portion of capital which consists of tools and materials may be said perhaps without any great impropriety to have a productive power because they contribute along with the labor to the accomplishment of production but that portion of capital which consists of wages has no productive power of its own wages have no productive power they are the price of a productive power wages do not contribute along with labor to the production of commodities no more than the price of tools contributes along with the tools themselves if labor could be had without purchase wages might be dispensed with that portion of capital which is expended in the wages of labor is only the means by which the capitalist procures to himself in the way of purchase the issue of that labor in which the power of production really resides the proper view of capital is that anything whatever which a person possesses constitutes his capital provided he is able and intends to employ it not in consumption for the purpose of enjoyment but in possessing himself of the means of production with the intention of employing those means productively now the means of production are labor implements and materials the only productive power which anywhere exists is the productive power of labor implements and materials we need not on this account altogether proscribe the expression productive power of capital but we should carefully note that it can only mean the quantity of real productive power which the capitalist by means of his capital can command this may change though the productive power of labor remains the same wages for example may rise and then although all the circumstances of production remain exactly as they were before the same capital will yield a less return because it will set in motion a less quantity of productive labor we may therefore consider the capital of a producer as measured by the means which he has of possessing himself of the different essentials of production namely labor and the various articles which labor requires as materials or of which it avails itself as aids the ratio between price which he has to pay for these means of production and the produce which they enable him to raise is the rate of his profit if he must give for labor and tools four-fifths of what they will produce the remaining fifth will constitute his profit and will give him a rate of one in four or twenty five percent on his outlay it is necessary here to remark what cannot indeed by any possibility be misunderstood but might possibly be overlooked in cases where attention to it is indispensable these that we are speaking now of the rate of profit not the gross profit if the capital of the country is very great a profit of only five percent upon it may be much more ample may support a much larger number of capitalists and their families in much greater affluence than a profit of twenty five percent on the comparatively small capital of a poor country the gross profit of a country is the actual amount of necessities conveniences and luxuries which are divided among its capitalists but whether this be large or small the rate of profit may be just the same the rate of profit is the proportion which the profit bears to the capital which the surplus produce after replacing the outlay bears to the outlay in short if we compare the price paid for labor and tools with what labor and those tools will produce from this ratio we may calculate the rate of profit as the gross profit may be very different though the rate of labor be the same so also may the absolute price paid for labor and tools be very different and yet the proportion between the price paid and the produce obtained may be just the same for greater clearness let us omit for the present the consideration of tools materials etc and conceive production as the results solely of labor in a certain country let us suppose the wages of each laborer are one quarter of wheat per year and one hundred men can produce in one year one hundred twenty quarters here the price paid for labor is to the produce of that labor as one hundred to one hundred twenty the profits are 20 percent suppose now that in another country wages are just double what they are in the country before supposed namely two quarters of wheat per year for each laborer but suppose likewise that the productive power of labor is double what it is in the first country that by the greater fertility of the soil one hundred men can produce two hundred forty quarters instead of one hundred twenty as before here it is obvious that the real price paid for labor is twice as great in the one country as in the other but the produce being also twice as great the ratio between the price of labor and the produce of labor is exactly the same an outlay of two hundred quarters gives a return of two hundred forty quarters and profits as before are 20 percent profits then meaning not gross profits but the rate of profit depend not upon the price of labor tools and materials but upon the ratio between the price of labor tools and materials and the produce of them upon the proportionate share of the produce of industry which it is necessary to offer in order to purchase that industry and the means of setting it in motion we have hitherto spoken of tools buildings and materials as essentials of production coordinate with labor and equally indispensable with it this is true but it is also true that tools buildings and materials are themselves the produce of labor and that the only cause causes of monopoly accepted of their having any value is the labor which is required for their production if tools buildings and materials were the spontaneous gifts of nature requiring no labor either in order to produce or to appropriate them and if they were thus bestowed upon mankind in indefinite quantity and without the possibility of being monopolized they would still be as useful as indispensable as they are now but since they could like air and the light of the sun be obtained without cost or sacrifice they would form no part of the expenses of production and no production of the produce would be required to be set aside in order to replace the outlay made for these purposes the whole produce therefore after replacing the wages of labor would be clear profit to the capitalist labor alone is the primary means of production the original purchase money which has been paid for everything tools and materials like other things have originally cost nothing but labor and have a value in the market only because wages have been paid for them the labor employed in making the tools and materials being added to the labor afterward employed in working up the materials by aid of the tools the sum total gives the whole of the labor employed in the production of the completed commodity in the ultimate analysis therefore labor appears to be the only essential of production to replace capital is to replace nothing but the wages of the labor employed consequently the whole of the surplus after replacing wages is profits from this it seems to follow that the ratio between the wages of labor and the produce of that labor gives the rate of profit and thus we arrive at Mr. Ricardo's principle that profits depend upon wages rising as wages fall and falling as wages rise to protect this proposition the most perfect form in which the law of profits seems to have been yet exhibited against misapprehension one or two explanatory remarks are required if by wages be meant what constitutes the real affluence of the laborer the quantity of produce which he receives in exchange for his labor the proposition that profits vary inversely as wages will be obviously false the rate of profit as has been already observed and exemplified does not depend upon the price of labor but upon the proportion between the price of labor and the produce of it if the produce of labor is large the price of labor may also be large without any diminution in the rate of profit and in fact the rate of profit is highest in those countries as for example North America where the laborer is most highly renumerated for the wages of labor though so large bear a less proportion to the abundant produce of labor there than elsewhere but this does not affect the truth of Mr. Ricardo's principle as he himself understood it because an increase in the laborer's real comforts was not considered by him as a rise of wages in his language wages were only said to rise when they rose not in mere quantity but in value to the laborer himself he would have said the quantity of his renumeration is the important circumstance but its value is the only thing of importance to the person who purchases his labor the rate of profits depends not upon absolute or real wages but upon the value of wages if however by value Mr. Ricardo had meant exchangeable value this proposition would still have been remote from the truth profits depend no more upon the exchangeable value of the laborer's renumeration than upon its quantity the truth is that by the exchangeable value is meant the quantity of commodities which the laborer can purchase with his wages so that when we say the exchangeable value of wages we say their quantity under another name Mr. Ricardo however did not use the word value in the sense of exchangeable value occasionally in his writings he could not avoid using the word as other people use it to denote a value in exchange but he more frequently employed it in a sense peculiar to himself to denote cost of production in other words the quantity of labor required to produce the article that being his criterion of cost of production thus if a hat could be made with ten days labor in France and with five days labor in England he said that the value of a hat was double in France of what it was in England if a quarter of corn could be produced a century ago with half as much labor as is necessary at present Mr. Ricardo said that the value of a quarter of corn had doubled Mr. Ricardo therefore would not have said that wages had risen because a laborer could obtain two pecks of flour instead of one for a day's labor but if last year he received for a day's labor something which required eight hours labor 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 labor which go to produce the wages of a day's labor an increase in the proportion of the fruits of labor which the laborer receives for his own share an increase in the ratio between the wages of his labor 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 explanation of Mr. Ricardo's doctrine to nearly the same effect as the above but in rather different means they have said that profits depend not on absolute but on proportional wages which they expound to mean the proportion which the laborers and mass 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 laborer and then to explain that by wages of laborer you do not mean the wages of an individual laborer but of all the laborers in the country collectively mankind will never agree to call anything a rise in wages except a rise in the wages of individual laborers 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 laborer that is the ratio between the wages of one laborer and not the whole produce of the country but the amount of what one laborer 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 labor of one individual laborer 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 labor 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 means to do is to clear it from certain difficulties which still surround it and which though 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 labor 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 laborers by whom they were produced the wages of those laborers 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 toolmaker but also the profits of the toolmaker 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 labor necessary to produce a given quantity of the commodity would be unaltered as well as the quantity of produce paid for that labor it seems that the ratio between the price of labor and its produce would be the same as before but 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 laborers 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 percent suppose for example that 60 agricultural laborers 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 operation is a produce of 180 quarters when we analyze the price of the seed and tools into its elements we find that they must have been the produce of the labor of 40 men for the wages of those 40 together with profit at the rate previously supposed 50 percent make up 60 quarters the produce therefore consisting of 180 quarters is the result of the labor altogether of 100 men namely the 61st mentioned and the 40 by whose labor 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 laborers equal to those required for producing the seed and fixed capital so that the saving shall be only in the profits of the previous capitalist 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 laborers receiving a quarter of corn each as before the rate of profit has inevitably risen it has increased from 50 percent to 60 percent a return of 180 quarters would 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 labor as before namely the labor of 100 men a quarter of corn therefore is still as before the produce of 10 18th of a man's labor for a year each laborer receives as before one quarter of corn each there receives the produce of 10 18th of a year's labor of one man that is the same cost of production each receives 10 18th of the produce of his own labor that is the same proportional wages and the laborers collectively still receive the same proportion namely 10 18th of the whole produce the conclusion then cannot be resisted that Mr. Riccardo's theory is defective at the rate of profits does not exclusively depend upon the value of wages in his sense namely the quantity of labor of which the wages of a laborer are the produce that it does not exclusively depend upon proportional wages that is upon the proportion which the laborers collectively receive of the whole produce or the ratio which the wages of an individual labor bear to the produce of his individual labor those political economists therefore who have always dissented from Mr. Riccardo'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 disputance 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. Riccardo's doctrine completely true it is even doubtful whether he himself if called upon to adapt his expressions to this particular case would not have so explained his doctrine as to render it entirely objectionable 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 labor of which they are the produce have not varied at all but though wages are still the produce of the same quantity of labor as before the cost of production of wages has nevertheless fallen for into cost of production there enters another element besides labor 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 labor 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 labor 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 laborer 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 enumeration of a single laborer is indeed the produce of the same quantity of labor as before but its cost of production is nevertheless diminished it is now the produce of ten eighteenths of a man's labor and nothing else whereas formally it required for its production the conjunction of that quarter of laborer with an expenditure in the form of reimbursement 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 laborer received one quarter of corn but one quarter of corn at that time was the result of the same cost of production as one in one fifth quarter now in order therefore that the laborer should receive the same cost of production each must now receive one quarter of corn plus one fifth the labor of 100 men could not be purchased at this price for less than 120 quarters and the produce 180 quarters would yield only 50 percent as first supposed begin footnote it would be easy to go over in the same manner any other case for instance if we suppose that instead of dispensing with the whole of the fixed capital material etc and taking on laborers an equal number to those by whom these were produced half only of the fixed capital and material is dispensed with so that instead of 60 laborers at a fixed capital where 60 quarters of corn we have 80 laborers with a fixed capital worth 30 the numerical statement of this case is more intricate than that in the text but the result is not different end footnote 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 proposition has been stated in figures and in a particular case we shall now state it in general terms for all cases we have supposed for simplicity that wages are paid in the finished commodity the agricultural laborers and our example were paid in corn and if we had called them weavers we should have supposed them to be paid in cloth the 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 comfortable 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 laborers 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 laborers he gave the article itself to the laborers and they sold it for their daily bread assuming therefore that the laborers paid in the very article that he produces it is evident that when any saving of expertise takes place in the production of that article if the laborer 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 variation 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 he meant not merely wages which are the produce of a smaller quantity of labor but wages which are produced at less cost reckoning labor 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 laborers collectively receive of the aggregate produced will not hold at all for that in our first example remained the same and yet profits rose end of part one of essay four