Professor

V.W.
Bladen
THE
THEORY OF POLITICAL ECONOMY.
THE
THEORY OF POLITICAL ECONOMY.
BY
W. STANLEY
JEVONS,
M.A. (Lorn)
PBOFESSOR OF LOGIC AND POLITICAL ECONOMY
IN OWENS COLLEGE,
MANCHESTER.
ano
$Ufo fork
MACMILLAN
AND CO.
1871.
I
All
rights reserved]
OXFORD:
BY T.
COMBE, M.A.,
E. B.
GARDNER,
AND E. PICKARD
HALL,
PRINTERS TO THE UNIVERSITY.
i
PREFACE.
THE contents of the
following pages
can
hardly
meet with
ready acceptance among
those who
regard
the Science of Political Eco-
nomy
as
having already acquired
a
nearly
perfect
form. I believe it is
generally sup-
posed
that Adam Smith laid the foundations
of this science
;
that
Malthus,
Anderson,
and
Senior added
important doctrines;
that Ricardo
systematised
the
whole; and,
finally,
that Mr.
J. S. Mill filled in the details and
completely
expounded
this branch of
knowledge.
Mr. Mill
appears
to have had a similar notion
;
for he
distinctly
asserts that there was
nothing
in the
Laws of Value which remained for himself
or
vi
Preface.
any
future writer to clear
up.
Doubtless it is
difficult to
help feeling
that
opinions adopted
and confirmed
by
such eminent men have much
weight
of
probability
in their favour.
Yet,
in
the other sciences this
weight
of
authority
has
not been allowed to restrict the free examina-
tion of new
opinions
and
theories;
and it has
often been
ultimately proved
that
authority
was
on the
wrong
side.
There are
many portions
of Economical
doctrine which
appear
to me as scientific in
form as
they
are consonant with facts. I
would
especially
mention the Theories of
Popu-
lation and
Rent,
the latter a
theory
of a dis-
tinctly
mathematical character which seems to
give
a clue to the correct mode of
treating
the whole science. Had Mr. Mill contented
himself with
asserting
the
unquestionable
truth
of the Laws of
Supply
and
Demand,
I should
have
agreed
with him. As founded
upon
facts,
those laws cannot be shaken
by any theory;
Preface.
vii
but it does not therefore
follow,
that our
con-
ception
of Value is
perfect
and final. Other
generally accepted
doctrines have
always ap-
peared
to me
purely
delusive,
especially
the
so-called
Wage
Fund
Theory.
This
theory pre-
tends to
give
a solution of the main
problem
of the science to determine the
wages
of la-
bour;
yet,
on close
examination,
its conclusion
is found to be a mere
truism,
namely,
that the
average
rate of
wages
is found
by dividing
the
whole amount
appropriated
to the
payment
of
wages by
the number of those between whom
it is divided. Some other
supposed
conclusions
of the science are of a less harmless
character,
as,
for
instance,
those
regarding
the
advantage
of
exchange
(see
p. 134).
In this work I have
attempted
to treat Eco-
nomy
as a Calculus of Pleasure
and
Pain,
and have sketched
out,
almost
irrespective
of
previous
opinions,
the
form which the
science,
as it seems
to
me,
must
ultimately
take. I
viii
Preface.
have
long thought
that as it deals
throughout
with
quantities,
it must be a mathematical
science
in matter if not in
language.
I have
endeavoured to arrive at accurate
quantitative
notions
concerning Utility,
Value, Labour,
Capi-
tal, &c.,
and I have often been
surprised
to find
how
clearly
some of the most difficult
notions,
especially
that most
puzzling
of notions
Value,
admit of mathematical
analysis
and
expres-
sion. The
Theory
of
Economy
thus treated
presents
a close
analogy
to the science of Sta-
tical
Mechanics,
and the Laws of
Exchange
are found to resemble the Laws of
Equilibrium
of a lever as determined
by
the
principle
of
virtual velocities. The nature of Wealth and
Value is
explained by
the consideration of in-
definitely
small amounts of
pleasure
and
pain,
just
as the
Theory
of Statics is made to rest
upon
the
equality
of
indefinitely
small amounts
of
energy.
But I believe that
dynamical
branches of the Science of
Economy may
Preface.
IX
remain to be
developed,
on the
consideration
of which I have not at all entered.
Mathematical readers
may perhaps
think that
I have
explained
some
elementary
notions,
that
of the
Degree
of
Utility,
for
instance,
with un-
necessary prolixity.
But it is to the
neglect
of Economists to obtain clear and accurate
notions of
quantity
and
degree
of
utility
that
I venture to attribute the
present
difficulties
and
imperfections
of the science
;
and I have
purposely
dwelt
upon
the
point
at full
length.
Other readers wiH
perhaps
think that the oc-
casional introduction of mathematical
symbols
obscures instead of
illustrating
the
subject.
But
I must
request
all readers to remember
that,
as Mathematicians and Political Economists
have hitherto been two
nearly
distinct classes
of
persons,
there is no
slight difficulty
in
pre-
paring
a mathematical work on
Economy
with
which both classes
of readers
may
not have
some
grounds
of
complaint.
x
Preface.
It is
very likely
that I have fallen into errors
of more or less
importance,
which I shall be
glad
to have
pointed
out
;
and I
may say
that
the cardinal
difficulty
of the whole
theory
is
alluded to in the section of
Chapter
IV
upon
the
'
Ratio of
Exchange/ beginning
at
p.
91.
So able a mathematician as
my
friend Pro-
fessor
Barker,
of Owens
College,
has had the
kindness to examine some of the
proof
sheets
carefully;
but he is
not, therefore,
to be held
responsible
for the correctness of
any part
of
the work.
My
enumeration of the
previous attempts
to
apply
mathematical
language
to Political Eco-
nomy
does not
pretend
to
completeness
even
as
regards English
writers
;
and I find that I
forgot
to mention a remarkable
pamphlet
*
On
Currency' published anonymously
in 1840
(Lon-
don,
Charles
Knight
and
Co.)
in which a ma-
thematical
analysis
of the
operations
of the
Money
Market is
attempted.
The method of
Preface.
xi
treatment is not unlike that
adopted by
Dr.
Whewell,
to whose Memoirs a reference is
made
;
but finite or
occasionally
infinitesimal
differences are
introduced. On the success of
this
anonymous theory
I have not formed an
opinion
;
but the
subject
is one which must
some
day
be solved
by
mathematical
analysis.
Gamier,
in his treatise on Political
Economy,
mentions several continental mathematicians
who have written on the
subject
of Political
Economy
;
but I have not been able to discover
even the titles of their Memoirs.
CONTENTS.
CHAPTER I.
INTRODUCTION.
PAGE
Mathematical Character of the Science 3
Prevailing
Confusion between Mathematical and Exact
Sciences 6
Capability
of Exact Measurement
8
Previous
Attempts
to
employ
Mathematical
Language
in
the Moral Sciences
14
Of the Measurement of
Feeling
and Motives .... 18
Logical
Method of Political
Economy
23
Relation of Political
Economy
to Moral
Philosophy
. . 27
CHAPTER II.
THEORY OF PLEASURE AND PAIN.
Of Pleasure and Pain as
Quantities
33
Pleasure and Pain related as Positive and
Negative
Quantities
38
Of
Anticipated Feelings
40
Uncertainty
of Future Events
42
xiv
Contents.
CHAPTER III.
THEOBY OF UTILITY.
PAGE
Definition of Terms 44
Laws of Human Want the Basis of
Economy
.... 46
Utility
not an Intrinsic
Quality
51
Law of the Variation of
Utility
53
Distinction between Total
Utility
and
Degree
of
Utility
. 58
The Final
Degree
of
Utility
and the Law of its Variation 61
Distribution of
Commodity
in different Uses ....
68
Duration of
Utility
71
Actual,
Prospective,
and Potential
Utility
72
The most
Advantageous
Distribution of a
Commodity
from time to time 74
CHAPTER IV.
THEORY OP EXCHANGE.
Importance
of
Exchange
in
Economy
79
Ambiguity
of the term Value,
and
proposed
introduction
of the
expression
Ratio of
Exchange
81
Definitions of Market and
Trading Body
84
Of the Ratio of
Exchange
91
The
Theory
of
Exchange
95
Symbolic
Statement of the
Theory
99
Impediments
to
Exchange
103
Illustrations
of the
Theory
of
Exchange
. . . . . . 105
Various Problems in the
Theory
of
Exchange
. . . .109
Complex
Cases of the
Theory
113
Failure of the
Equations
of
Exchange
..... . . 118
Equivalence
of Commodities . . .. 127
Contents. xv
PAGE
Acquired
Utility
of Commodities 130
The
Advantage
of
Exchange
. 134
Mode of
ascertaining
the Variation of
Utility
. . . . 140
Opinions
of Economists on the Variation of Price . . . 142
On the
Origin
of Value 155
CHAPTER V.
THEORY OP I, ABOUB.
Definition of Labour 162
Quantitative
Notions of Labour 165
Symbolic
Statement of the
Theory
170
Balance between Need and Labour 174
Distribution of Labour 178
Relation of the Theories of Labour and
Exchange
. . . 181
Various Cases of the
Theory
. . 185
Of
Over-production
190
Limits to the
Intensity
of Labour 191
CHAPTER VI.
THEORY OF RENT.
Accepted Opinions
concerning
Rent 198
Symbolic
Statement of the
Theory
204
Illustration of the
Theory
208
CHAPTER VII.
THEORY OF
CAPITAL.
On the True Nature and Definition of
Capital
. . . . 212
Quantitative
Notions
concerning Capital
221
xvi
Contents.
PAGE
Expression
for Amount of Investment 224
Effect of the Duration of Work 225
Illustrations of the Investment of
Capital
229
Fixed and
Circulating Capital
232
Free and Invested
Capital
233
Uniformity
of the Rate of Interest 235
General
Expression
for the Rate of Interest 236
The
Tendency
of Profits to a Minimum 238
The
Advantage
of
Capital
to
Industry
242
Are Articles in the Consumers' hands
Capital
? . . . . 245
CHAPTER VIII.
CONCLUDING REMARKS.
The Doctrine of
Population
254
The Relation of
Wages
and Profit 256
Professor Hearn's Views 263
The Noxious Influence of
Authority
265
THE
THEORY
OF
POLITICAL
ECONOMY
CHAPTER I.
INTRODUCTION.
THE science of
P^liticai_EcDnomy
rests
upon
a
few notions of an
apparently simple
character.
Utility^
..jgalne, Jabomy -land,
capital,
are
the;
elements of the
subject ;
and whoever has a
thorough comprehension
of their
nature,
must
possess
or be soon able to
acquire
a
knowledge
of the whole science. As almost
every
econo-
mical writer has
remarked,
it is in the
simple
elements that we
require
the most care and
precision,
since the least error of
conception
must vitiate all our deductions.
Accordingly,
I
have devoted the
following pages
to a
complete
investigation
of the conditions and relations of
the above-named notions.
B
2
The
Theory of
Political
Economy.
Repeated
reflection and
inquiry
have led me
to the somewhat novel
opinion,
that value de-
liends entirely upon utility.
Prevailing opinions
make labour rather than
utility
the
origin
of
value
;
and there are even those
who
distinctly
assert,
that labour is the cause of value.
I
show,
on the
contrary,
that we have
only
to
trace out
carefully
the natural laws of the vari-
ation of
utility,
as
depending upon
the
quantity
of
commodity
in our
possession,
in order to
arrive at a
satisfactory theory
of
exchange,
of
which the
ordinary
laws of
supply
and demand
are a
necessary consequence.
This
theory
is
in
perfect harmony
with
facts;
and whenever
there is
any apparent
reason for the
belief,
that
labour is the cause of
value,
we obtain a com-
plete explanation
of the reason. Labour is
found often to determine
value,
but
only
in an
indirect
manner,
by varying
the
degree
of uti-
lity
of
the
commodity through
an
increase
in
the
supply.
These views are not
put
forward in a
hasty
or ill-considered manner. All the chief
points
of the
theory
were sketched out ten
years ago
;
but
they
were then
published only
in the form
of a
very
brief
paper
communicated to the
Statistical or Economic Section of the British
Introduction. 3
Association at the
Cambridge Meeting
in the
year
1862. A still briefer abstract of that
paper
was inserted in the
Report
of the Meet-
ing
a
,
and the
paper
itself was not
printed
until
June 1866
b
. Since
writing
that
paper,
I
have,
over and over
again, questioned
the truth of
my
own
notions,
but without ever
finding any
reason to doubt their substantial correctness.
I have therefore
thought
it needless to
delay
any longer submitting
the
theory
to the criti-
cism of those who are interested in the
progress
of Political
Economy.
Mathematical Character
of
the Science.
It seems
perfectly
clear
that
Economy,
if it
is to be a science at
all,
must be a mathe-
matical
science.
There exists much
prejudice
against attempts
to introduce the methods and
language
of mathematics into
any
branch of the
moral sciences. Most
persons appear
to hold
that the
physical
sciences form the
proper sphere
of mathematical
method,
and that the moral
sciences demand some other
method,
I know
not what.
My theory
of
Economy,
however,
is
a
'Report
of the British
Association,
Cambridge,
1862.'
'
Reports
of
Sections,'
p.
158.
b
'
Journal of the Statistical
Society,'
vol. xxix.
p.
282.
B 2
4
The
Theory of
Political
Economy.
purely
mathematical in character.
Nay,
find-
ing
that the
quantities
with which we have to
deal are
subject
to continuous
variation,
I do
not hesitate to use the
appropriate
branch of
mathematical
science,
involving though
it does
the fearless consideration of
infinitely
small
quantities.
The
theory
consists in
applying
the
differential calculus to the familiar notions of
wealth,
utility,
value, demand,
supply, capital,
interest, labour,
and all the other notions be-
longing
to the
daily operations
of
industry.
As the
complete theory
of almost
every
other
science involves the use of that
calculus,
so we
cannot have a true
theory
of Political
Economy
without its aid.
To me it seems that our science must be
mathematical,
simply
because it deals with
quantities.
Wherever the
things
treated are
capable
of
being
more or less in
magnitude,
there the laws and relations must be mathe-
matical in nature. The
ordinary
laws of
sup-
ply
and demand treat
entirely
of
quantities
of
commodity
demanded or
supplied,
and
express
the mode in which the
quantities vary
in con-
nection with the
price. By
this fact the laws
^^^^\
.- - . -
r
^-
(are)
mathematical : Economists cannot
deprive
them of their nature
by denying
them the
i
Introduction. 5
name
;
they might
as well
try
to alter red
light
by calling
it blue. Whether or not the mathe-
matical laws of
Economy
are stated
op-ra tne usual
symbols,
x,
y,
z,
is an
accident,
ora""iiitiie matter of
cotiveiiieiiut^
The^most
complicated
mathematical
problems may
be
stated in
ordinary language,
and their solution
might
be traced out
by
words. In
fact,
some
of the most
distinguished
mathematicians have
displayed
a
great liking
for
getting
rid of their
symbols,
and
expressing
their
arguments
and
results in
language
as
nearly
as
possible ap-
proximating
to that in common use.
Laplace
attempted
to
express
the truths of
physical
astronomy
in common
language
in his admi-
rable
'
Systeme
du Monde
;'
and Thomson and
Tait interweave their
great
'
Treatise on Na-
tural
Philosophy
5
with an
interpretation
in
ordinary
words,
supposed
to be within the
comprehension
of
general
readers.
These
attempts,
however
distinguished
and
ingenious
their
authors,
soon disclose the inhe-
rent defects of the
grammar
and
dictionary
for
expressing complicated
relations. The
sym-
bols of mathematical books are not different
in nature from
language
;
they
are
merely
a
perfected system
of
language, adapted
to the
6
The
Theory of
Political
Economy.
notions and relations which we need to
express.
They
do not make the mode of
reasoning they
embody
;
they merely
facilitate its exhibition
and
comprehension.
If, then,
in Political Eco-
nomy
we have to deal with
quantities
and com-
plicated
relations of
quantities,
we
must
reason
mathematically;
we do not render the science
less
mathematical
by avoiding
the
symbols
of
al^ebra^we merely
refuse to
employ,
in a
very
imperfect
science,
much
needing every
kind of
assistance,
that
apparatus
of
signs
which is
found
indispensable
in other sciences.
Prevailing Confusion
between Mathematical and
Exact Sciences.
Many persons
indeed seem to entertain a
pre-
judice against
mathematical
language, arising
out of a confusion between a mathematical
science and an exact science.
They
think that
we must not
pretend
to calculate unless we
have the
precise
data,
which will
give
a
precise
answer to our calculations
; but,
in
reality,
there is no such
thing
as an exact
science,
except
in a
comparative
sense.
Astronomy
is
more exact than other
sciences,
because the
position
of a
planet
or a star admits of close
Introduction.
7
measurement
; but,
if we examine the methods
of
physical astronomy,
we find that
they
are
all
approximate.
Every
8f
n**n
f(
involves
hypo-
theses which are not
really
true':
as,
for
instance,
that the earth is a
sntooth,
homogeneous sphe-
roid. Even the
apparently simpler problems
in
statics or
dynamics
are
\
only
hypothetical
ap-
proximations
to the truth.
We can calculate the effect of a
crow-bar,
provided
it be
perfectly
inflexible and have a
perfectly
hard
fulcrum,
which is never the
case
c
. The data are almost
wholly
deficient
for the
complete
solution of
any
one
problem
in natural science. Had
physicists
waited until
their data were
perfectly precise
before
they
brought
in the aid of
mathematics,
we should
have still been in the
age
of science which
terminated at the time of Galileo.
When we examine the less
precise physical
sciences,
we find that
physicists
are,
of all
men,
most bold in
developing
their mathematical
theories in advance of their data. Let
any
one
who doubts this examine
Airy's
'
Theory
of
the Tides
d
;'
he will find a
wonderfully complex
c
Thomson and Tail's 'Treatise on Natural
Philosophy,'
vol. i.
p.
337.
d
'
Encyclopaedia Metropolitana.'
8 The
Theory of
Political
Economy.
mathematical
theory
which is confessed
by
its author to be
incapable
of exact or even
approximate application,
because the results of
the various and often unknown
shapes
of the
seas do not admit of numerical verification.
In^
this and
many
other cases we
may
have
perfect
mathematical
theory
without the data
requisite
for
precise
calculations.
The
greater
or less
accuracy
attainable in a
mathematical science is a matter of
accident,
and does not affect the fundamental character
of the science. There can be but two classes
of sciences those which are
simply logical,
and
those
which,
besides
being logical,
are also mathe-
matical.
If there be
any
science which deter-
mines
merely
whether a
thing
be or be not
whether an event will
happen,
or will not
hap-
pen
it must be a
purely logical
science
;
but
if the
thing may
be
greater
or
less,
or the event
may happen
sooner or
later,
nearer or
farther,
then
quantitative
notions
enter,
and the science
must be mathematical in
nature,
by
whatever
name we call
it.
Capability of
Exact
Measurement.
Many
will
object,
no
doubt,
that the notions
which we treat in this science are
incapable
of
Introduction.
9
any
measurement. We cannot
weigh,
or
gauge,
or test the
feelings
of the mind
;
there is no
unit of
labour,
or
suffering,
or
enjoyment.
It
might
thus seem as if a mathematical
theory
of Political
Economy
would be
necessarily
de-
prived
for ever of
any
numerical data;
In the first
place,
I would
remark,
that no-
thing
is less warrantable in science than an
uninquiring
and
unhoping spirit.
In..
matters
of
this
kind,
those who
despair
are almost inva-
riably
those "who have never tried to succeed.
A man
jmight
be allowed to
despair
had he
spent
a lifetime on a difficult task without
a
gleam
of
encouragement
;
Ibut the
popular
opinions
on the extension of mathematical
theory
tend to deter
any
man from
frttompting
tasks
which,
however
difficult,
ought,
some
day,
to be
achieved.f
If we trace the
liigtoiy_of
other
sciences,
we
gather
no_lessojis~~of~
discouragement.
In the
case of almost
everything
which is now
exactly
measured,
we can
go
back to the time when the
vaguest
notions
prevailed.
Previous to the time
of
Pascal,
who would have
thought
of
measuring
doubt and
belief?
Who could have conceived
that the
investigation
of
petty games
of chance
would have led to the creation of
perhaps
the
10
The
Theory of
Political
Economy.
most sublime and
perfect
branch of mathema-
tical science the
theory
of
probabilities
?
There are sciences
which,
even within the me-
mory
of men now
living,
have become
exactly
quantitative.
When Adam Smith founded Poli-
tical
Economy
in
England, electricity
was a
vague phenomenon,
which was
known, indeed,
to be
capable
of more or
less,
but was not mea-
sured nor calculated : it is within the last
thirty
or
forty years
that a mathematical
theory
of
electricity,
founded on exact
data,
has been
established. We now
enjoy
the most
precise
quantitative
^
nations---conceriiing_Jifiat,
and can
measure the
temperature
of a
body
to less than
-s-oVo-
part
of a
degree Centigrade. Compare
this
precision
with that of the earliest makers
of
thermometers,
the Academicians del
Cimento,
who used to
graduate
their instruments
by
placing
them in the sun's
rays
to obtain a
point
of fixed
temperature.
The late Mr. De
Morgan excellently
said
6
,
'
As to some
magnitudes,
the clear idea of mea-
surement comes soon : in the case of
length,
for
example.
But let us take a more difficult
one,
and trace the
steps by
which we
acquire
and
fix the idea:
say weight.
What
weight
is,
we
e
'
Formal
Logic,' p.
175.
Introduction. 11
need not know
We know it as a
mag-
nitude before we
give
it a name :
any
child can
discover the more that there is in a
bullet,
and
the less that there is in a cork of twice its size.
Had it not been for the
simple
contrivance of
the
balance,
which we are well assured
(how,
it matters not
here)
enables us to
poise equal
weights against
one
another,
that
is,
to detect
equality
and
inequality,
and thence to ascertain
how
many
times the
greater
contains the
less,
we
might
not to this
day
have had much clearer
ideas on the
subject
of
weight,
as a
magnitude,
than we have on those of
talent,
prudence,
or
self-denial,
looked at in the same
light.
All
who are ever so little of
geometers
will remem-
ber the time when their notions of an
angle,
as
a
magnitude,
were as
vague
as,
perhaps
more
so
than,
those of a moral
quality
;
and
they
will
also remember the
steps by
which this
vague-
ness became clearness and
precision.'
Now there can be no doubt whatever
that
pleasure, pain,
labour,
utility,
value,
wealth,
money, capital,
&c. are all notions
admitting
of
quantity: nay,
the whole of our actions in in-
dustry
and trade
certainly depend upon
com-
paring quantities
of
advantage
or
disadvan-
tage.
Even the most abstract theories of morals
12 The
Theory of
Political
Economy.
have
fully recognised
the
quantitative
character
of the
subject.
Bentham's
*
Introduction to the
Principles
of Morals and
Legislation'
is tho-
roughly
mathematical in the character of the
method. He tells us to estimate the
tendency
of an action
f
thus :
'
Sum
up
all the values of
all the
pleasures
on the one
side,
and those of
all the
pains
on the other. The
balance,
if it
be on the side of
pleasure,
will
give
the
good
tendency
of the
act,
upon
the
whole,
with re-
spect
to the interests of that individual
person
;
if on the side of
pain,
the bad
tendency
of it
upon
the whole/
I confess that it seems to me difficult even to
imagine
how such estimations and summations
can be made with
any approach
to
accuracy.
Greatly though
I admire the clear and
precise
notions of
Bentham,
I know not where his
numerical data are to be found.
'Then
where,'
the reader will
perhaps
ask,
|
'
are
your
numerical data for
estimating plea-
sures and
pains
in Political
Economy
?
'
I an-
swer,
that
my
numerical data are more abund-
|
ant and
precise
than those
possessed by any
I
other
science,
but that we have not
yet
known
how to
employ
them. The
very
abundance
of
f
p.
52.
Introduction. 13
oundata
is
perplexing.
There is not a clerk or
book-keeper
in the
country
who is not
engaged
in
recording
numerical data. The
private
ac-
count
books,
the
great ledgers
of merchants and
bankers and
public
offices,
the share
lists,
price
lists,
bank
returns,
monetary intelligence,
Cus-
tom-house and other Government
returns,
are
all full of the kind of numerical data
required
to render Political
Economy
an exact mathe-
matical science. Thousands of folio volumes of
statistical,
parliamentary,
or other
publications
await the labour of the
investigator.
It is
partly
the
very
extent and
complexity
of the
information which deters us from its
proper
use. But it is
chiefly
a want of method and
completeness
in this vast mass of information
which
prevents
our
readily employing
it in the
investigation
of the natural laws of Political
Economy.
Far be it from me to
say
that we ever shall
have the means of
measuring directly
the feel-
ings
of the human heart. A unit of
pleasure
or of
pain
is difficult even to
conceive;
but it
is the amount of these
feelings
which is con-
tinually prompting
us to
buying
and
selling,
borrowing
and
lending,
labouring
and
resting,
producing
and
consuming;
and it is from the
14
The
Theory of
Political
Economy.
quantitative
effects of the
feelings
that we must
estimate their
comparative
amounts. We can
no more know or measure
gravity
in its own
nature than we can measure a
feeling,
but
just
as we measure
gravity by
its effects in the mo-
tion of a
pendulum,
so we
may
estimate the
equality
or
inequality
of
feelings by
the
varying
decisions of the human mind. The will is our
pendulum,
and its oscillations are
minutely
re-
gistered
in all the
price
lists of the markets. I
/ know not when we shall have a
perfect system
/ of
statistics,
but the want of it is the
only
in-
superable
obstacle in the
way
of
making
Poli-
I
'
tical
Economy
an exact science. In the absence
of
complete
statistics,
the science will not be
less
mathematical,
though
it will be
infinitely
less useful than
if,
comparatively speaking,
ex-
act. A correct
theory
is the first
step
towards
improvement, by showing
what we need and
what we
might accomplish.
Previous
Attempts
to
employ
Mathematical
Language
in the Moral Sciences.
Several writers
have,
from time to
time,
ap-
plied
the
language
and
processes
of mathema-
tical
reasoning
to the moral or
political
sciences.
Introduction. 15
As
long ago
as the
early part
of last
century,
Francis
Hutcheson,
in his
'Inquiry
into the
Original
of our Ideas of
Beauty
and
Virtue/
gave
formulae for
representing
the motives of
the human minds. It
may
be
said,
perhaps.
t . A^__CV
f
that little
advantage
arises... jrcm. .their
use,
be-
cause the relations
expressed
Jhave not a
degree
of
complexity demanding
the aid of
symbols.
But I have never been able to see
anything
absurd in their
employment, though
Hutche-
son's
example
has found few followers.
Among political
economists,
Dr. Whewell has
made the most elaborate
attempt
to
apply
ma-
thematical formulae to the science. In 1829
and 1831 he read to the
Cambridge
Philoso-
phical Society
two
long
memoirs
h
,
containing
a mathematical
exposition
of the doctrines laid
down in Ricardo's
'
Principles
of Political Eco-
nomy.'
These
papers
have received the least
possible
attention from economists
;
I do
not,
in
fact,
remember a
single
reference to them. Yet
8
Third
edition, 1729,
pp.
186-191.
h
'
Mathematical
Exposition
of some Doctrines of Political
Economy.' Cambridge Philosophical
Transactions,
vol. iii.
p.
191.
(Read
March
1829.)
'
Mathematical
Exposition
of the
leading
Doctrines in Mr.
Ricardo's
"
Principles
of Political
Economy
and Taxation."
'
Ib.
vol. iv.
p.
155.
(Read April
and
May 1831.)
1 6
The
Theory of
Political
Economy.
they possess
considerable
interest,
and are re-
markable for clearness of
style.
These memoirs
fail,
however,
to lead to
any
satisfactory
results,
probably
because
they
are
a mere translation in
symbols
of Ricardo's
propositions,
some of which are of doubtful
soundness. The
very
use of a mathematical
language
should be to render deductive reason-
ing easy
and
sure,
so that we can
independently
reach and
prove
the conclusions of economists
whenever
they
are true. But this is the reverse
of Dr. Whewell's method. I
consider, too,
that
his mathematical
processes
are
wholly
unsuited
to the science. He treats
quantities
of
demand,
supply, wages, profits,
interest,
&c. as
simple
discontinuous
amounts,
and
proposes
to deter-
mine them
by equations
of a
simple
kind.
He
regards questions
in
economy
as little more
difficult than sums in arithmetic.
Dr. Whewell's
example
was followed
by
Mr.
Tozer in memoirs on the effect of
machinery
upon
the wealth of a
country
and the rate of
wages,
and on the effect of the non-residence of
landlords
1
. These memoirs seem to be almost
as able as those of Dr.
Whewell,
but are of a
i
'
Mathematical
Investigation
of the Effect of
Machinery
on
the Wealth of a
Country,
and the Fund for the
Payment
of
Introduction. 17
very
similar character
;
and it can
hardly
be
said that
they
lead to new truths. In more
recent
years,
Mr. M
c
Leod has
applied algebraic
formulae to economical
questions, especially
to
Banking
k
. I
may
also mention Professor Fleem-
ing
Jenkin's
'
Graphic
illustrations of the Laws
of
Supply
and
Demand,'
in an
essay published
a
year
or two since
1
.
There exists a. work
by
Dr.
Lardner
m
on
*
Railway Economy,'
a statistical treatise
on
the cost and financial conditions of
railway
communication,
which treats certain
questions
of Political
Economy
in a
highly
scientific and
mathematical
spirit.
Thus the relation of the
rate of fares to the
gross receipts
and net
profits
of a
railway company
is
beautifully
demon-
strated in
pp.
286-293,
by
means of a
diagram.
It is
proved
that the maximum
profit
occurs
at the
point
where the curve of
gross receipts
becomes"
parallel
to the curve of
expenses
of
Wages.' By
John
Tozer,
B.A.
Cambridge Philosophical
Transactions,
vol. vi.
p.
507.
'
On the Effect of the Non-residence
of Landlords on the
Wealth of a
Community/
ib. vol. vii.
p.
189.
k
'
The
Theory
and Practice of
Banking,'
vol. i.
p.
189.
'
Dictionary
of Political
Economy,'
article
Credit,
&c.
1
'
Recess Studies.'
m
'
Railway Economy,' by Dionysius
Lardner,
D.C.L. Lon-
don,
1850.
O
18 The
Theory of
Political
Economy.
conveyance.
The most
advantageous
rate of
charge
in this and
many
other similar cases is
that at which a
very
small
change
of the rate
makes no
appreciable
difference in the net
profits.
In a work to which I shall have occasion to
refer more than
once,
Mr.
Jennings
has
pointed
out that
prices,
rates of
interest,
and other dis-
tinct
money quantities
form the metallic
indices,
and the means of observation in our
science",
'
not less
capable
of
being
made subservient to
the
processes
of exact calculation than are the
instruments of
any purely physical
art.' And
he adds the
remark,
*
The results of these
prin-
ciples,
when
observed,
may
thus be
expressed
in
figures
;
as
may
also be the
anticipated
re-
sults of their future
operation,
or such relations
as those of
quantity
and
value,
value and rate
of
production, may
be exhibited in the
formulae,
1
analysed by
the different methods of
alge-
bra and of fluxions/ This is a clear statement
.
of the views which I have also
adopted.
a\^
Of
the Measurement
of Feeling
and Motives.
Many
readers
may,
even after
reading
the
preceding
remarks,
consider it
quite impos-
n
'
Natural Elements of Political
Economy,' pp.
259,
260.
Introduction. 19
sible to create such a calculus as is here con-
templated,
because we have no means of denn-
ing
and
measuring quantities
of
feeling,
like we
can measure a
mile,
or a
right angle,
or
any
other
physical quantity.
I have
granted
that
we can
hardly
form the
conception
of a unit of
pleasure
or
pain,
so that the numerical
expres-U
sion of
qua^nti1^^>fj^jiij^.!sp.pimsi
to fr? roit of
the"questiojii
x
But we
only employ
units of
measurement in
other
things
to facilitate the
comparison
of
qua^tities^and.
if
we,..Qan^com-
pare
the
quantities directly,
we do not need
the
units./Now
the mind of an individual is
the balance which makes its own
comparisons,
and is the final
judge
of
quantities
of
feeling.
As Mr. Bain
says
,
*
It is
only
an identical
pro-
position
to affirm that the
greatest
of two
plea-
sures,
or what
appears
such,
sways
the
resulting
action
;
for it is this
resulting
action that alone
determines which is the
greater.'
Pleasures,
in
short, are,
for the time
being,
as
the mind estimates them
;
so that we cannot
make a
choice,
or manifest the will in
any
way,
without
indicating thereby
an excess of
pleasure
in some direction. It is true that
the mind often hesitates and is
perplexed
in
o
'
The Emotions and the
Will,'
p.
447.
C 2
20 The
Theory of
Political
Economy.
making
a choice of
great importance
: this in-
dicates either
varying
estimates of the motives
concerned,
or a
feeling
of
incapacity
to
grasp
the
quantities
concerned. I should not for a
moment think of
claiming
for the mind
any
accurate
power
of
measuring
and
adding
and
subtracting feelings,
so as to
get
an exact ba-
lance. We can seldom or never affirm that one
pleasure
is a
multiple
of another in
quantity
;
but the reader who
carefully
criticises the fol-
lowing theory
will find that it seldom in-
volves
the
comparison
of
quantities
of
feeling
differing
much in amount. The
theory
turns
upon
those critical
points
where
pleasures
are
nearly,
if not
quite, equal.
I never
attempt
to
estimate the whole
pleasure gained by pur-
chasing
a
commodity
;
the
theory merely
ex-
presses
that,
whena man has
purchased enough,
he derives
equal pleasure
from the
possession
of a small
quantity
more or from the
money
price
of it.
Similarly,
the whole amount of
pleasure
that a man
gains by
a
day's
labour
hardly
enters the
question
;
it is when a man is
doubtful whether to increase his hours of labour
or
not,
that we discover an
equality
between
the
pain
of that extension and the
pleasure
of the
increase of
possessions
derived from it.
Introduction. 21
The reader will
find,
again,/
that there is
never,
in a
single
instance,
an
attempt
made
to
compare
the amount of
feeling
in one mind
with that in
another.
I see no means
by
which \ ,
such
comparison
can ever be
accomplished^
The
susceptibility
of one mind
may,
ior wnat we
know,
be a
thousand
times
greater
than that
of another.
.
But,
provided
that the
suscepti-
bility
was different in a like ratio in all direc-
tions,
we should never be able to discover the
profoundest
difference.
Every
mind is thus in-
scrutable to
every
other
mind,
and no common
denominator of
feeling
is
possible.
Even if we
could
compare
the
feelings
of different
minds,
we should not need to do so
;
for one mind
only
affects another
indirectly. Every
event in the
outward world is
represented
in the mind
by
a
corresponding
motive,
and it is
by
the balance
of these that the will is
swayed.
I must here
point
out
that,
though
the
theory presumes
to
investigate
the condition of
a
mind,
and bases
upon
this
investigation
the
whole of Political
Economy,
practically
it is
j
an
aggregate
of individuals which will be
treated. The
general
form of the laws of Eco-
nomy
is the same
in the case of individuals and
nations^aiid,
in
reality,
it is a law
operating
22 The
Theory of
Political
Economy.
in the case of multitudes of individuals
which
gives
rise to the
aggregate represented
in the
transactions of a nation.
Practically,
however,
it is
quite impossible
to
^d^te^t
t^
p
"p^ti""
of
general
laws of
thisykmd
in the actions
of one
or a few individuals.
The motives and condi-
...
-
tions are so numerous and
complicated,
that
the
resulting
actions have the
appearance
of
caprice,
and are
beyond
the
analysis
and
pre-
diction of science. With
every
increase in the
price
of such a
commodity
as
sugar,
we
ought,
theoretically speaking,
to find
every person
re-
ducing
his
consumption by
a small
amount,
and
according
to some
regular
law. In
reality, many
persons
would make no
change
at all
;
a
few,
probably,
would
go
to the extent of
dispensing
with the use of
sugar altogether
while its cost
was excessive. It is
by examining
the
average
consumption
of
sugar
in a
large population
that
we should detect a continuous variation con-
nected with the variation of
price by
a constant
law. It will
not,
of
necessity, happen,
that the
law will be
exactly
the same in the case of
aggregates
and
individuals,
unless all those in-
dividuals be of the same character and
position
as
regards
wealth and habits
;
but there will be
a more or less
regular
law to which the same
Introduction.
23
kind of formulae will
apply.
The use of an
average,
or,
what is the
same,
an
aggregate
result
depends upon
the
high probability
that
accidental and
disturbing
causes will
operate,
in the
long
run,
as often in one direction as
the
other,
so as to neutralise each other. Pro-
vided that we have a sufficient number of inde-
pendent
cases,
we
may
then" detect the effect
of
any
tendency,
however
slight. Accordingly,
questions
which
appear,
and
perhaps
are
quite,
indeterminate as
regards
individuals,
may
be
capable
of exact
investigation
and solution in
regard
to
great
masses and wide
averages.
Logical
Method
of
Political
Economy.
I
may
add a few words on the
logical
cha-
racter of the science of Political
Economy,
as
to which somewhat diverse
opinions
have been
held. I
iliinlf
tbat..Mr^
Mill is
right
in consi-
dering
it an instance of the Concrete Deductive
Method, or,
as I have elsewhere
proposed
to call
it,
the
Complete Method?,
which Mr. Mill has
so
admirably
described <i. Political
Economy
is,
nndmihf.pdiy,
groHflflgdjiipon
cfoserved facts,
and 1
is,
so
far,
an
inductive science
;
|but
it does
'
Elementary
Lessons in
Logic,' p.
258.
'
System
of
Logic,'
book vi.
chap.
9,
s. 1.
24 The
Theory of
Political
Economy.
not
proceed by
an elaborate collection of facts
and their
gradual
classification,
as Mr. Richard
Jones would have us believe. A few of the
simplest principles
or axioms
concerning
the
nature of the human mind must be taken as
its first
starting-point, just
as the vast theories
of mechanical science are founded
upon
a few
simple
laws of motion. That
every person
will
i
j __
choose the
greater apparent good
;
that human
""^""^^ m-
^>^<<>i ^
(ff
' "
wants are more or less
quickly
satiated
;
that
prolonged
labour becomes more and more
pain-
jS
fill,
are a few of the
simple
inductions on which
we can
ground,
as I
attempt
to
show,
a com-
plete
deductive mathematical
theory.
Thence
we deduce the laws of
supply
and
demand,
the
nature and laws of that
ambiguous
and difficult
conception,
value
;
especially
the laws
govern-
ing
its relation to labour or cost of
production.
The
theory,
however,
needs
verification,
and this
it finds in the
agreement
of its conclusions with
common sense and direct observation.
The
theory may, perhaps,
be described as the
mechanics of human interest. I
may
have
committed
oversights
in
explaining
its details
;
but I conceive
that,
in its main
features,
this
theory,
whether useful or
useless,
must be the
true one. Its method is as sure and demon-
Introduction. 25
strative as that of kinematics or
statics,
nay,
almost as
self-evident,
when the real
meaning
of the formulae is
fully
seized,
as are the ele-
ments of Euclid.
The usefulness of the
theory
is a different
question
from that of its
truth,
and is one
upon
which I am not
quite
so confident. To attain
correct and clear notions of the nature of value
and
capital
is, indeed,
the first essential of a
knowledge
of Political
Economy
;
and to this
object
the
following pages
are in a
great degree
devoted. But I do not hesitate to
say,
too,
that Political
Economy might
be
gradually
erected into an exact
science,
if
only
commer-
cial statistics were far more
complete
and ac-
curate than
they
are at
present,
so that the
formulae could be endowed with exact
meaning
by
the aid of numerical data. These data would
consist
chiefly
in accurate accounts of the
quan-
tities of
goods possessed
and consumed
by
the
community,
and the
prices
at which
they
are
exchanged.
There is no reason whatever
why
we should not have those
statistics,
except
the
cost and trouble of
collecting
them,
and the
unwillingness
of
persons
to afford
information.
The
quantities
themselves to be measured and
registered
are most concrete and
precise.
In
26
The
Theory of
Political
Economy.
a few
cases we
already
have information
ap-
proximating
to
completeness,
as when a com-
modity
like
tea,
sugar,
coffee,
or tobacco is
wholly imported.
But when articles are un-
taxed,
and more or
les^ produced
within
the
country,
we have
yet
the
vaguest
notions
of the
quantities
consumed. Some
slight
success is
now,
at
last,
attending
the efforts to
gather
agricultural statistics;
and the
great
need felt
by
men
engaged
in the cotton and other trades
to obtain accurate accounts of
stocks,
imports,
and
consumption,
will
probably
lead to the
pub-
lication of far more accurate information than
we have hitherto
enjoyed.
ThQ_deductive
science of
Economy
must be
verified and rendered useful
by
the
purely
in-
ductive science of Statistics.
Theory
must be
invested with the
reality
and life of fact. But
the difficulties of this union are
immensely
great,
and I
appreciate
them
quite
as much as
does Professor Cairnes in his admirable lectures
'
On the Character and
Logical
Method of Poli-
tical
Economy.'
I make
hardly
any
attempt.
to
^.^^^^^*
employ
statistics in this wor
E,
and thus I do
not
pretend
to
any
numeric;
before we
attempt any
inve
precision.
But,
tigation
of
facts,
and
of
what,
words of
'
If
Introduction.
T w
27
d
any,
in the
ommerce/
one has
a
right
to
enjertain
a
prejudice against
them
merely
because tljey af
pTlf
nf fTlp
common
road/
Relation
of
Political
Economy
to Moral
Philosophy.
I wish to
say
a few
words,
in this
place, upon
the relation of
Economy
to moral science. The
theory
which follows is
entirely
based on a cal-
culus of
pleasure
and
pain
;
and the
object
of
Economy
is to maximise
happiness by purchas-
ing pleasure,
as it
were,
at the lowest cost of
pain.
The
language employed may
be
open
to
misapprehension,
and it
may
seem as if
plea-
sures and
pains
of a
gross
kind were treated as
the all-sufficient motives to
guide
the mind of
man. I have no hesitation in
accepting
the
Utilitarian
theory
of morals which does
up-
hold the effect
upon
the
happiness
of mankind
as the criterion of what is
right
and
wrong.
But I have never felt that there is
anything
in
that
theory
to
prevent
our
putting
the widest
and
highest interpretation upon
the terms used.
28
The
Theory of
Political
Economy.
Jeremy
Bentham
put
forward the Utilitarian
theory
in the most
uncompromising
manner.
According
to
him,
whatever is of interest or
importance
to us must be the cause of
plea-
sure or of
pain ;
and when the terms are used
with a
sufficiently
wide
meaning, pleasure
and
pain
include all the forces which drive us
to action.
They
are
explicitly
or
implicitly
the
object
of all our
calculations,
and form
the ultimate
quantities
to be treated in all
the moral sciences. The words of Bentham
on this
subject may require
some
explanation
and
qualification,
but
they
are too
grand
and
too full of truth to be omitted.
'
Nature/
he
says
r
,
'
has
placed
mankind
under
the
go-
vernance of two
sovereign
masters
paw
and
pleasure.
It is for them alone to
point
out
what we
ought
to
do,
as well as to determine
what we shall do. On the one hand the stand-
ard of
right
and
wrong,
on the other the chain
of. causes and
effects,
are fastened to their
throne.
They govern
us in all we
do,
in all we
say,
in all we think :
every
effort we can make
to throw off our
subjection
will serve but to
demonstrate and confirm it. In words a man
r
'
An Introduction to the
Principles
of Morals and
Legis-
lation,'
by Jeremy
Bentham. Edition of
1823,
vol. i.
p.
1.
Introduction.
29
may pretend
to
abjure
their
empire
; but,
in
reality,
he will remain
subject
to it all the
while. The
principle of utility
recognises
this
subjection,
and assumes it for the foundation
of that
system,
the
object
of which is to rear
the fabric of
felicity by
the hands of reason and
of law.
Systems
which
attempt
to
question
it,
deal in sounds instead of
sense,
in
caprice
in-
stead of
reason,
in darkness instead of
light.'
In connection with this
passage
we
may
take
that of
Paley,
who
says,
with his usual clear
brevity
s
,
'
I hold that
pleasures
differ in
nothing
but in continuance and
intensity.'
The
acceptance
or
non-acceptance
of the
basis of the Utilitarian doctrine
depends,
in
my
mind,
on the exact
interpretation
of the
language
used.
As it seems to
me,
the
feelings
of which a
man is
capable
are of various
grades.
He is
always subject
to mere
physical pleasure
or
pain, necessarily arising
from his
bodily
wants
and
susceptibilities.
He is
capable
also of mental
and moral
feelings
of several
degrees
of eleva-
tion. A
higher
motive
may rightly
overbalance
all considerations
belonging
even to the next
8
'
Principles
of Moral and Political
Philosophy,'
book i.
chap.
6.
30
The
Theory of
Political
Economy.
lower
range
of
feelings
;
but so
long
as the
higher
motive does not
intervene,
it is
surely
both desirable and
right
that the lower motives
should be balanced
against
each other. Start-
ing
with the
lowjesfc-stage
it is a man's
duty,
as it is his natural
inclination, to
earn sufficient
food and whatever else
may
best
satisfy
his
proper
and moderate
desires/
If the claims of a
family
or of friends fall
upon
him,
it
may
become
desirable that he should
deny
his own desires
and even his
physical
needs their
customary
gratification.
But the claims of a
family
are
only
a
step
to a
higher grade
of duties.
The
safety
of a
nation,
the welfare of
great
populations, may happen
to
depend upon
his
exertions,
if he be a soldier or a statesman :
claims of a
very strong
kind
may
now be over-
balanced
by
claims of a still
stronger
kind. Nor
should I venture to
say
that,
at
any point,
we
have reached the
highest
rank the
supreme
mo-
tives which should
guide
the mind. Tka states-
man
may
discover a conflict between
motives;
a
measure
jnay promise,
as it would
seem,
the
greatest good
to
great
numbers,
and
yet
there
may
be motives of
uprightness
and honour that
may,
hinder or forbid his
promoting
the mea-
sure. How such difficult
questions may
be
Introduction. 31-
4
rightly
determined it is not
my purpose
to
inquire
here.
The Utilitarian
theory
holds,
that all forces
influencing
the mind of man are
pleasures
and
pains ;
and
Paley
went so far as to
say,
that
all
pleasures
and
pains
are of one kind
only.
Mr. Bain has carried out this view to its com-
plete
extent,
saying
*,
'
No amount of
complica-
tion is ever able to
disguise
the
general
fact,
that our
voluntary activity
is moved
by only
two
great
classes of stimulants
;
either a
plea-
sure or a
pain, present
or
remote,
must lurk in
every
situation that drives us into action/ The
question certainly appears
to turn
upon
the lan-
guage
used. Call
any
motive which attracts to
a certain action
pleasure,
and that which deters
pain,
and it becomes
impossible
to
deny
that
all actions are
prompted by pleasure
or
by
pain.
But it then becomes
indispensable
to
admit that a
single higher pleasure
will en-
tirely
neutralise a vast extent and continuance
of lower
pains.
It seems
hardly possible
to
admit
Paley's
statement,
except
with an inter-
pretation
that would
probably
reverse his in-
tended
meaning.
Motives and
feelings
are cer-
tainly
of the same kind to the extent that we
*
'
The Emotions and the
"Will,'
p.
460.
32 The
Theory of
Political
Economy.
are able to
weigh
them
against
each other
;
but
they
are, nevertheless,
almost
incomparable
in
power
and
authority.
My present purpose
is
accomplished
in
point-
ing
out this
hierarchy
of
feeling,
and
assigning
a
proper place
to the
pleasures
and
pains
with
which
Economy
deals. It is
theJlow^^jajik
of
feelings
which we here treat. The calculus of
utility
aims at
supplying
the
ordinary
wants of
man at the least cost of labour. Each
labourer,
in the absence of other
motives,
is
supposed
to
devote his
energy
to the accumulation of wealth.
A
higher
calculus of moral
right
and
wrong
would be needed to show how he
may
best em-
ploy
that wealth for the
good
of others as well
as himself. But when that
higher
calculus
gives
no
prohibition,
we need the lower calculus to
gain
us the utmost
good
in matters of moral
indifference. There is no rule of morals to for-
bid our
making
two blades of
grass grow
instead
of
one, if,
by
the wise
expenditure
of
labour,
we can do so.
And we
may certainly say,
with
Bacon,
'while
philosophers
are
disputing
whether virtue or
pleasure
be the
proper
aim of
life,
do
you provide yourself
with the instru-
ments of either.'
CHAPTER II.
THEORY OF
PLEASURE AND PAIN.
Of
Pleasure and Pain as
Quantities.
PROCEEDING to consider how
pleasure
and
pain
can be
estimated as
magnitudes,
we must un-
doubtedly accept
what Bentham has laid down
upon
this
subject.
'To a
person,'
he
says
a
,
'
considered
by
himself,
the value of a
pleasure
or
pain,
considered
~by itself,
will be
greater
or
less
according
to the four
following
circum-
stances :
(1)
Its
intensity.
(2)
Its duration.
(3)
Its
certainty
or
uncertainty.
(4)
Its
propinquity
or remoteness.
These are the circumstances which are
to be
considered in
estimating
a
pleasure
or a
pain
considered each of them
by
itself.'
a
Introduction,
p,
49.
D
34 The
Theory of
Political
Economy.
Bentham
b
, indeed,
goes
on to consider three
other circumstances which relate to the
ulti-
mate and
complete
eftect of
any
act or
feeling
;
these are
(5) Fecundity,
or the chance a
feeling
has of
being
followed
by feelings
of the same
kind : that
is,
pleasures,
if it be a
plea-
sure
;
pains,
if it be a
pain.
(6) Purity,
or the chance it has of not
being
followed
by feelings
of an
opposite
kind. And
(7)
Extent,
or the number of
persons
to
whom it
extends,
and who are affected
by
it.
These three last circumstances are of the
high-
est
importance
as
regards
the
theory
of morals
;
but
they
will not enter into the more
simple
and restricted
problem
which we
attempt
to
solve in Political
Economy.
A
feeling,
whether of
pleasure
or of
pain,
may
be
regarded
as
having essentially
two di-
mensions.
Every feeling
must last some
time,
and it
may
last a
longer
or shorter time : while
it
lasts,
it
may
be more or less acute and in-
tense.
If,
in two
instances,
the duration of
feeling
is the
same,
that will
possess
the
greater
b
Introduction,
p.
50.
Theory of
Pleasure and Pain. 35
magnitude
which is the most
intense;
or we
may say
that,
with the same
duration,
the
magnitude
will be
proportional
to the
intensity
when
properly expressed.
On the other
hand,
if the
intensity
of a
feeling
were to remain
constant,
the
magnitude
of the
feeling
would
increase with its duration. Two
days
of the
same
degree
of
happiness
are to be twice as
much desired as one
day;
two
days
of
suffering
are to be twice as much feared. If the inten-
sity
ever remained
fixed,
the whole
magnitude
would be found
by multiplying
the number of
units of
intensity
into the number of units of
duration.
Pleasure and
pain,
then,
are
magni-
tudes
possessing
two
dimensions,
just
as an area
or
superficies possesses
the two dimensions of
length
and breadth.
In almost
every
case, however,
the
intensity
of a
feeling
will
change
from moment to mo-
ment. Incessant variation characterises our
feelings,
and this is the source of the main dif-
ficulties of the
subject.
Nevertheless,
if these
variations can at all be traced
out,
or
any ap-
proach
to method and law
detected,
it will not
be
impossible
to form a
conception
of the re-
sulting quantity
of
feeling.
We
may imagine
that the
intensity changes
at the end of
every
D 2
36
The
Theory of
Political
Economy.
minute,
but remains constant in the intervals.
The
quantity during
each minute will be
repre-
sented,
as in
Fig.
I,
by
a
rectangle
whose
narrow
base is
supposed
to
correspond
to the
duration
of a
minute,
and whose
height
is
proportional
Pr-\
HgJ.
to the
intensity. Along
the line ox we mea-
sure
time,
and
along
a
parallel
to the
perpen-
dicular line
oy
we measure
intensity.
Each of
the
rectangles
between
pm
and
qn
represents
the
feeling
of one
minute,
or of
any
other small
portion
of time assumed. The
aggregate quan-
tity
of
feeling generated during
the time mn
will then be
represented by
the
aggregate
area
of the
rectangles
between
pm
and
qn.
In
K this case the
intensity
of the
feeling is_sup-
H
posed
to be
gradually
declining/
But it is an artificial
assumption
that the
intensity
would
vary by
sudden
steps
and
Theory of
Pleasure and Pain. 37
regular
intervals. The error thus committed will
not be
great
if the intervals of time are
very
short,
and will be less the shorter the intervals
are made. To avoid all
error,
we
may imagine
the
intervals of tune
infinitely
short;
that
is,
we must treat the
intensity
as
constantly
and
continuously varying.
Thus the
proper repre-
sentation of the variation of
feeling
is found in
a curve of more or less
simple
character. In
Fig.
II the
height
of each
point
of the curve
pq,
above the horizontal line
ox,
indicates
the
intensity
of
feeling
in an indivisible
moment
of time
;
and the whole
quantity
of
feeling
generated
in the tune mn is measured
by
the area of the curve between the lines
pm
y
qn,
mn,
and.
pq.
The
feeling belonging
to
any
other
time, ma,
will be measured
by
the
38 The
Theory of
Political
Economy.
space mabp,
cut off
by
the
perpendicular
line ab.
Pleasure and Pain related as Positive
and
Negative
Quantities.
It will be
readily
conceded
by
the
reader
that
pain
is the
opposite
of
pleasure
;
so that to
de-
crease
pain
is to increase
pleasure
;
to add
pain
is to decrease
pleasure.
Thus we
may
treat
pleasure
and
pain
as
positive
and
negative quan-
tities are treated in
algebra.
The
algebraic
sum
of a series of
pleasures
and
pains
will be ob-
tained
by adding
the
pleasures together
and the
pains together,
and then
striking
the balance
by subtracting
the smaller amount from the
greater.
Our
object
will
always
be to maxim-
ise the
resulting
sum in the direction of
plea-
sure,
which we
may fairly
call the
positive
direction. This we shall
really
do
by accept-
ing everything,
and
undertaking every
action of
which the
resulting pleasure
exceeds the
pain
which is
undergone
;
we must avoid
every
object
or action which leaves a balance in the
other
direction.
One of the most
important points
of the
theory
will turn
upon
the exact
equality
of
the
pleasure
derived from the
possession
of an
Theory of
Pleasure and
Pain. 39
object,
and the
pain
encountered in its
acquisi-
tion. I am
glad,
therefore,
to
quote
the follow-
ing passage
from Mr.
Bain's treatise on 'The
Emotions and the Will
'
(p. 30),
in which
he ex-
actly expresses
the
opposition
of
pleasure
and
pain
:
'
When
pain
is followed
by pleasure,
there is a
tendency
in the
one,
more or
less,
to neutralise the other. When the
pleasure
exactly assuages
the
pain,
we
say
that the two
are
equivalent,
or
equal
in
amount,
although
off
opposite
nature,
like hot and
cold,
positive
and
negative;
and when two different kinds of
plea-
1
i
sure have the
power
of
satiating
the same
amount of
pain,
there is fair
ground
for
pro-
nouncing
them of
equal
emotional
power.
Just
\
as acids are
pronounced equivalent
when in
amount sufficient to neutralise the same
por-
tion of
alkali,
and as heat is estimated
by
the
quantity
of snow melted
by
it,
so
pleasures
are
fairly compared
as to their total
efficacy
on
the
mind,
by
the amount of
pain
that
they
are
capable
of
submerging.
In this sense there
may
be an effective
estimate of
degree/
40
The
Theory of
Political
Economy.
Of anticipated Feelings.
Benthani has stated
,
that one of the main
etements^in
estimating
the force of
a
pleasure
or
pain
is its
propinquity
or remoteness.
It is
certain that a
very large part
of what we
experience
in life
depends
not on the actual
circumstances of the
moment,
so much as on
the
anticipation
of future events. As Mr. Bain
says
d
,
'The foretaste of
pleasure
is
pleasure
begun:
every
actual
delight
casts before it a
corresponding
ideal.'
Every
one must have felt
that the
enjoyment actually experienced
at
any
moment is but limited in
amount,
and
usually
fails to answer to the
great anticipations
which
have been formed.
'
Man never is but
always
to be blest
'
is a correct
description
of our ordi-
nary
state of
mind;
and there is little doubt
that,
in minds of much
intelligence
and fore-
sight,
the
greatest
force of
feeling
and motive
is what arises from the
anticipation
of the
future.
Now,
between the actual amount of
feeling
anticipated
and that which is felt there must
be some natural
relation,
very
variable no
doubt,
c
See
above,
p.
33.
d
'
The Emotions and the
Will,'
p.
74.
Theory of
Pleasure and Pain.
41
according
to
circumstances,
according
to the
intellectual
standing
of the
race,
or the character
of the individual
;
and
yet subject
to some
gene-
ral law of variation. The
intensity
of
present
feeling
must,
to use a mathematical
expression,
be some
function of
the
future feeling,
and it
must increase as we
approach
the moment of
realisation. The
change, again,
must be less
rapid
the further we are from the
moment,
and
more
rapid
as we come nearer to it. An event
which is to
happen
a
year
hence affects us on
the
average
about as much one
day
as another
;
but an event of
importance,
which is to take
place
three
days
hence,
will
probably
affect us
on each of the
intervening days
more
acutely
than the last.
f
This
power
of
anticipation
must have a
large
influence in
Economy
;
for
upon
it is based all
|
accumulation
of stocks of
commodity
to be con-
'
sumed at a future time. That class or race of
L_
m^m m*^m "
men who have the most
foresight
will work
most for the future. The untutored
savage
is
wholly occupied
with the troubles of the mo-
ment;
the morrow is
dimly
felt;
the limit of
his horizon is but a few
days
off. The
wants^
of
a future
year,
or of a
lifetime,
are
wholly
un-
foreseen.
But,
in a state of
civilisation,
a
vague
42
The
Theory of
Political
Economy.
though powerful
feeling
of
the .future
is the
~~]
main incentive to
industry
and
saving.
THe__
cares of the moment are but
ripples
on the tide
of achievement and
hope.
We
may safely
call
that man
happy
who,
however
lowly
his
posi-
tion and limited his
possessions,
can
always
hope
for more than he
has,
and feel that
every
moment of exertion tends to realise his
aspira-
tions.
He,
on the
contrary,
who seizes the en-
joyment
of the
passing
moment without
regard
to
coming
times,
must
feel,
sooner or
later,
that
his stock of
pleasure
is on the
wane,
and that
even
hope begins
to fail.
Uncertainty of
Future Events.
In
admitting
the force of
anticipated feeling,
we are
compelled
to take account of the uncer-
tainty
of all future events. We
ought
never to"!
:
-
I
estimate the value of that which
may
or
may
I
not
happen
as if it would
-.certainly
happenj
When it is as
likely
as not that I shall receive
100,
the chance is worth but
50,
because
if,
for a
great many
times in
succession,
I
pur-
chased the chance at this
rate,
I should almost
certainly
not lose nor
gain.
The test of a cor-
rect estimation of
probabilities
is
that,
in the
1
long
run,
the calculations
prove
true on the
Theory of
Pleasure and Pain. 43
average.
If we
apply
this rule to all future
interests,
we must reduce our estimate of
any
feeling
in the ratio of the numbers
expressing
the
probability
of its occurrence. If the
proba-
bility
is
only
one-tenth that I shall have a cer-
tain
day
of
pleasure,
I
ought
to
anticipate
it
with one-tenth of the force which would
belong
to it if certain. In
selecting
a course of action
which
depends
on uncertain
events, as,
in
fact,
does
everything
in
life,
I should
multiply
thel
force of
every
future event
by
the fraction d-
A
noting
its
probability.
A
great casualty,
which/
is
very unlikely
to
happen, may
not be so im-
portant
as a
slight casualty
which is
nearly
sure
to
happen.
Almost
unconsciously
we make cal-
culations of this kind more or less
accurately
in all the
ordinary judgments
of
life;
and in
systems
of
life, fire, marine,
or other
insurance,
we
carry
out the calculations to
great perfec-
tion. In all
industry
directed to future
pur-
poses,
we must take similar account of our want
of
knowledge
of what is to be.
CHAPTER III.
-
T
H EOBY OF
UTILITY.
Definition of
Terms.
PLEASURE and
pain
are
undoubtedly
the ulti-
mate
objects
of the Calculus of
Economy.
To
satisfy
our wants to the utmost with the least
effort to
procure
the
greatest
amount of what
is desirable at the
expense
of the least that is
.. undesirable in other
words,
to
mj^i
fort
and-sxleasure,
is
the
problem
o,f
But it is convenient to transfer our attention
as soon as
possible
to the
physical objects
or
actions
which
are the source to us of
pleasures
or
pains.
A
very large part
of the labour of
any community
is
spent upon
the
production
of the
ordinary
necessaries and conveniences of
life, food,
clothing, buildings,
utensils, furniture,
ornaments,
&c.
;
and the
aggregate
of these ob-
jects
constitute, therefore,
the immediate
object
of our attention.
Theory of Utility.
45
It will be convenient at once to introduce
and define some terms which will facilitate the
expression
of the
Principles
of
Economy. -By
a
commodity
we shall understand
any object,
r
>v -
"
'--
-~~" ^ -
ii
*
'
i
i^^CZn^^^^^i-^^^^^^ \
or,
it
may
be,
any
action or
service,
which can
afford
pleasure
or
'
warcl
olt^arn.
rne name
was
originally
abstract,
and denoted the
quality
of
anything by
which it was
capable
of
serving
man.
Having acquired, by
a common
process
of
confusion,
a concrete
signification,
it will be
well to retain it
entirely
for that
signification,
and
employ
the word /utility
to denote the
abstract
quality whereby
an
object,
serves mir
purposes,
and becomes entitled to rank as a
commodity.-
Whatever can
produce^
prevent
pain- may possess utility./
M.
Say
has
correctly
and
briefly
defined
utility
as
'
la fa-
cult6
qu'ont
les choses de
pouvoir
servir a
rhomme,
de
quelque
maniere
que
ce soit/ /The
food which
prevents
the
pangs
of
hunger,
the
clothes which fend off the cold of
winter,
_pps-
sess
incontestable
utility:
but we must beware
of
restricting
the
meaning
of the word
by any
moral
considerations.
^Anything
which an indi-
'
vidual is found to desire and to labour for
must
])e assumed to
possess
for
him
utility./
In the
'
science of
Economy
we treat men not as
they
46
The
Theory of
Political
Economy.
ought
to
be,
but as
they
are.
Bentham,
in esta-
blishing
the foundation of Moral Science in his
great
'
Introduction to the
Principles
of Morals
and
Legislation' (p. 3),
thus
comprehensively
de-
fines the term in
question
:
'^By
utility
is meant
that
property
in
any object, whereby
it tends to
produce
benefit,
advantage, pleasure, good,
or
happiness
(all
this,
in the
present
case,
comes
to the same
thing),
or
(what
comes
again
to
the same
thing)
to
prevent
the
happening
of
mischief,
pain,
evil,
or
unhappiness
to the
party
whose interest is
considered//
This
perfectly expresses
the
meaning
of the
word in
Economy, provided
that the will or
inclination of the
person
concerned is taken as
the sole
criterion,
for the
time,
of what is
good
and
desirable,
or
painful
and evil.
Laws
of
Human Want the Basis
of
Economy.
I
Political
Economy
must be founded
upon
a
full and accurate
investigation
of the conditions
'
of
utility
;
and,/toun^erjtand
this
elemj-mtwe
must
jnecessarily, examine tne_clmracter
or the
wants and desires of man!
We,
first of
all,
ifeea a
theory
of the
consumption
of wealth.
Mr. J. S.
Mill, indeed,
has
given
an
opinion
Theory of Utility.
47
inconsistent with this.
'
Political
Economy/
he
says
e
,
'
has
nothing
to do with the
consumption
of
wealth,
further than as the consideration of
it is
inseparable
from that of
production,
or from
that of distribution. We know not of
any
laws
of the
consumption
of
wealth,
as the
subject
of
a distinct science
;
they
can be no other than
the laws of human
enjoyment/
But
it,
is
surely
obyj
tfrfli
PHitHil
^^
nomy
does rest
upon
the laws of human
enjoy-
mjgnt
;
and
that,
if those laws are
developed by
no other
science,
they
must be
developed -by
economists.
/We
labour to
produce
with the
sole
object
of
consuming,
and the kinds and
amounts of
goods produced
must be
governed
entirely by
our
requirements. jSypry
mamifag-
turer knows and feels how
closely
he must .an-
ticipate
the tastes and needs of his
customers:
his
whole success
depends upon
it
; and,
in like
manner,
the whole
theory
of
Economy
depends
\\
uponc~a
correct
theorv^of
consumption./
Many
|\
economists
havejiad
a clear
perception
of this
truth. Lem Lauderdafe
distinctly
states
f
,
that
6
'
Essays
on some unsettled
Questions
of Political
Economy,'
p.
132.
f
'Inquiry
into the Nature and
Origin
of Public
Wealth,'
second
edition, 1819,
p.
306.
48
The
Theory of
Political
Economy.
"'the
great
and
important step
towards
ascer-
taining
the causes of the direction which in-
dustry
takes in nations .... seems to be the
discovery
of what dictates the
proportion
of
demand for
thejmous
articles which are
pro-
duced.'
^^Senipjvjn
his admirable
treatise,
has also
recognised
this
truth,
and
pointed
out
what he calls the Law
of Variety
in human re-
quirements.
The necessaries of life are so few
and
simple,
that a man is soon satisfied in re-
gard
to
these,
and desires to extend his
range
of
enjoyment.
His first
object
is to
vary
his
food
;
but there soon arises the desire of
variety
and
elegance
in dress
;
and to this succeeds the
desire to
build,
to
ornament,
and to furnish
tastes which are
absolutely
insatiable where
they
exist,
and seem to increase with
every
improvement
in civilisations.
Bastiat has also observed that human wants
are"tne ultimate
object
of
Economy;
and in his
*
Harmonies of Political
Economy
'
he
says
h
,
'
Wants,
Efforts, Satisfaction
this is the circle
of Political
Economy.'
8
'Encyclopaedia Metropolitana,'
art. Political
Economy,
p.
133. Fifth edition of
Keprint, p.
11.
h
'Harmonies of Political
Economy,'
translated
by
P. J.
Stirling, 1860,
p.
65.
Theory of Utility.
49
In still later
years,
M. Courcelle-Seneuil actu-
ally
commenced his treatise with a definition
of
want
'
Le besoin
conomique
est un d^sir
qui
a
pour
but la
possession
et la
jouis-
sance d'un
objet
materiel
1
.' And I conceive
that he has
given
the best
possible
statement
of the
problem
of
Economy
when he
expresses
its
object
as
'
a satisfaire nos besoins avec la
moindre somme de travail
possible
k
.'
Professor Hearn also commences his excellent
treatise,
entitled
'
Plutology,
or the
Theory
of
Efforts to
supply
Human
Wants/
with a
chap-
ter in which he considers the nature of the
wants
impelling
man to exertion.
The
writer, however,
who seems to me to
have reached the
deepest comprehension
of the
foundation of
Economy,
is Mr. T. E. Banfield.
His course of Lectures delivered in the Univer-
sity
of
Cambridge
in
1844,
and
published
under
the title of
'
The
Organization
of
Labour/
is
highly interesting,
but
perhaps
not
always
cor-
rect. In the
following passage
1
he
profoundly
points
out that the scientific, basis of
Economy
i
'Trait
The'orique
et
Pratique
d'Economie
Politique,' par
J. Q.
Courcelle-Seneuil,
2me ed.
Paris, 1867,
torn. i.
p.
25.
k
76.
p.
33.
1
Second
edition,
p. 11.^
E
50 The
Theory of
Political
Economy.
is in a
theory
of
consumption
: I need make no
excuses for
quoting
this
passage
at full
length.
'The lower wants man
experiences
in com-
mon with brutes. The
cravings
of
hunger
and
thirst,
the effects of heat and
cold,
of
drought
and
damp,
he feels with more acuteness than
the rest of the
animal
world. His
sufferings
are doubtless
sharpened by
the consciousness
that he has no
right
to be
subject
to such in-
flictions.
Experience,
however,
shows that
pri-
vations of various kinds affect men
differently
in
degree, according
to the circumstances in
which
they
are
placed.
For some men the
priva-
tion of certain
enjoyments
is
intolerable,
whose
loss is not even felt
by
others.
Some,
again,
sacri-
fice all that others hold dear for the
gratification
of
longings
and
aspirations
that are
incompre-
hensible to their
neighbours. Upon
this
complex
foundation of low wants and
high aspirations
the Political Economist has to build the
theory
of
production
and
consumption.
'
An examination of the nature and
intensity
of
man's
wants shows that this connection be-
tween them
gives
to Political
Economy
its scien-
tific basis. The first
proposition
of the
theory
of
consumption
is,
that the
satisfaction of every
lower want in the scale creates a desire
ofajugher
Theory of Utility.
51
If the
higher
desire existed
previous
to the satisfaction of the
primary
want,
it be-
comes more intense when the latter is removed.
The removal of a
primary
want
commonly
awakens the sense of more than one
secondary
privation
: thus a full
supply
of
ordinary
food not
only
excites to
delicacy
in
eating,
but awakens
attention to
clothing.
Thejiighest
grade
in the
scale of
wants, that_pf pleasure
derived
fromjthe
beauties of nature and
art,
is
usually
confined
to men who are
exempted
from all the lower
privations.
Thus the demand
for,
and the con-
sumption
of,
objects
of refined
enjoyment
has
its lever in the
facility
with which the
primary
wants are satisfied.
This, therefore,
is the
key
to the true
theory
of value. Without relative
values in the
objects
to the
acquirement
of which
we direct our
power,
there would be no founda-
tion for Political
Economy
as a science/
Utility
not an Intrinsic
Quality.
My principal
work now lies in
tracing
out the
exact nature and conditions of
utility.
It seems
strange
indeed that economists have not be-
stowed more minute attention on a
subject
which
doubtless furnishes the true
key
to the
problem
of
Economy.
E 2
52 The
Theory of
Political
Economy.
t ^^\ I
(In
the
^rst/place,/utility, though
a
quality
of
/^^^^^^
things,
i&fao
inherent
quality.
It
might
be more
accurately
described,
perhaps,
as a circumstance
of things arising
out of their relation to man's
requirements.
/
As Mr. Senior most
accurately
says,
*
Utility
denotes no intrinsic
quality
in the
things
which we call useful J it
merely expresses
then* relations to the
pains
and
pleasures
of
mankind/
We can
never, therefore,
say
abso-
lutely
that some
objects
have
utility
and others
have not./ The ore
lying
in the
mine,
the dia-
mond
escaping
the
eye
of the
searcher,
the
wheat
lying unreaped,
the fruit
ungathered
for
want
of
consumers,
have not
utility
at all. The
most wholesome
and
necessary
kinds of food
are useless
nnles^
there aJre
hands to collect
and mouths to eat them.
Nor,
when we con-
sider the matter
closely,
call
we
say
that all
portions
of the same
commodity possess equal
utility_/7
Water,
for
instance,
may
be
roughly
described as the most useful of all substances.
A
quart
of water
per day
has the
high utility
of
saving
a
person
from
dying
in a most distress-
ing
manner. Several
gallons
a
day may possess
much
utility
for such
purposes
as
cooking
and
washing;
but after an
adequate supply
is se-
cured for these
uses,
any
additional
quantity
is
Theory of Utility.
53
a
matterjifjndifference.
All that we can
say,
then, is,
that
water,
up
to a certain
quantity,
is
indispensable
;
that further
quantities
will have
various
degrees
of
utility
;
but that
beyond
a
certain
point
the
utility appears
to cease.)
(
Exactly
the same considerations
apply
more
or less
clearly
to
every
other article. A
pound
of bread
per day supplied
to a
person
saves him
from
starvation,
and has the
highest
conceivable
utility.
A second
pound per day
has also no
slight utility:
it
keeps
him in a state of com-
parative
plenty, though
it be not
altogether
indispensable.
A third
pound
would
begin
to
be
superfluous.
It is clear
Ahe^that/w^7%
is,
\
^
,
f
*^^
^mi I
not
proportional
to
commodity:
the
very
same
\
articles
vary
in
utility /according
as we
already
possess
more or less of the same article. The
like
may
be said of other
things.
One suit of
clothes
per
annum is
necessary,
a second con-
venient,
a third
desirable,
a fourth not
unaccept-
able;
but
we,
sooner or
later,
reach a
point
at
which further
supplies
are not desired with
any
perceptible
force,
unless it be for
subsequent
use.
Law
of
the Variation
of Utility.
Let us now
investigate
this
subject
a little
more
closely.
-
Utility
must be considered as
54:
The
Theory of
Political
Economy.
measured
by,
or even as
actually
identical
with,
the addition made to a
person's happiness.)
It
is a convenient name for the
aggregate
of the
favourable balance of
feeling produced
the sum
of the
pleasure
created and the
pain prevented.
IWernust
now
carefully
discriminate between
the total
utility belonging
to
any commodity
and
the
utility belonging
to
any particular portion
1 S .
of it,
/
Thus the total
utility
of the food we eat
consists in
maintaining
life,
and
may
be con-
sidered as
infinitely great;
but if we were to
subtract a tenth
part
from what we eat
daily,
our loss would be ~but
slight.-
It
might
be
doubtful whether we should suffer
any
harm at
all. Let us
imagine
the whole
quantity
of food
which a
person
consumes on an
average during
twenty-four
hours to be divided into ten
equal
parts.
If his food be reduced
by
the last
part,
he will suffer but little
;
if a second tenth
part
be
deficient,
he will feel the want
distinctly;
the subtraction of the third tenth
part
will
be
decidedly injurious;
with
every subsequent
subtraction of a tenth
part
his
sufferings
will be
more and more
serious,
until at
length
he will
be
upon
the
verge
of starvation.
Now,
Jif
we
call each of the tenth
parts
an
increment,
the
meaning
of these facts
is,
that each
incEement
Theory of Utility.
55
of
Jbod-is.less
necessary,
or
possesses
less
utility,
than
the
previous
one.l
To
represent
this vari-
ation of
utility,
we
may
make use of
space-
representations,
which I have found it conve-
nient to
employ
in
illustrating
the laws of
Economy
in
my
lectures
during
seven or
eight
years
past.
VII VIH IX
Let the line ox be used as a measure of the
quantity
of
food,
and let it be divided into ten
equal parts
to
correspond
to the ten
parts
of
food mentioned above.
Upon
these
equal
lines
are constructed
rectangles,
and the area of each
rectangle may
be assumed to
represent
the util-
ity
of the increment of food
corresponding
to
its base. Thus the
utility
of the last increment
is
small,
being proportional
to the small rect-
angle
on x. As we
approach
towards
o,
each in-
crement bears a
larger rectangle,
that
standing
56 The
Theory of
Political
Economy.
upon
in
being
the
largest complete rectangle.
The
utility
of the next
increment, n,
as also
that
of
i,
is
undefined,
since these
portions
of
food
would
be
indispensable
to
life,
and their
utility,
therefore,
infinitely great.
We can now form a clear notion
of the
utility
of the whole
food,
or of
any part
of it
;
for we
have
only
to add
together
the
proper rectangles.
The
utility
of the first half of the food will be
the sum of the
rectangles standing
on the line
oa
;
that of the second half will be
represented
by
the sum of the smaller
rectangles
between
a and b. The total
utility
of the food will be
the whole sum of the
rectangles,
and will be
infinitely great.
^
The
comparative degree
of
utility
of the
several
portions
is, however,
the most
import-
ant
point
to be considered, f
Utility
is
a_jjyan-.
\
tity
o_at
least two
dimensions,
on
ft dimansi on
(consisting
in the
quantity
of the
commodity,
land another in the
intensity
of the effect
pro-
duced
upon
the
consumer
A
Now,
the
quantity
of the
commodity
is measured on the horizon-
tal line
ox,
and the
intensity
of
utility
will be
measured
by
the
length
of the
upright
lines,
or
ordinates,
as
they
are
commonly
called
by
mathematicians. The
intensity
of
utility
of the
Theory of Utility.
57
third
increment is measured either
by pq,
or
p'q,
and its
utility
is the
product
of the units
in
pp by
those in
pq.
But the division of the food into ten
equal
parts
is an
arbitrary supposition.
If we had
taken
twenty
or a hundred or more
equal
parts,
the same
general principle
would hold
true,
namely,
thatfeach
small
portion
would be
less useful and
necessary
than the
lastj
The law
may
be considered to hold true
theoretically,
however small the increments are made
;
and
in this
way
we shall at last reach a
figure
which
is
undistinguishable
from a continuous curve.
The notion of
infinitely
small
quantities
of food
may
seem absurd as
regards
one individual
; but,
when we come to consider the
consumption
of
nations as a
whole,
the
consumption may
well
be
conceived to increase or diminish
by quan-
tities
which
are,
practically speaking, infinitely
small
compared
with the whole
consumption.
The law of the variation of the
degree
of
utility
of food
may
thus
be
represented by
a
continuous curve
pbq (Fig. IV),
and the
per-
pendicular height
of each
point
of the curve
above the line
ox,
represents
the
degree
of
utility
of the
commodity
when a certain amount,
has been consumed.
58 The
Theory of
Political
Economy.
Thus,
when the
quantity
oa has been con-
sumed,
the
degree
of
utility corresponds
to the
length
of the line
a&;
for if we take a
very
RyJV
little more
food, aaf,
its
utility
will be the
pro-
duct of aaf and ab
very nearly,
and more
nearly
the less is the
magnitude
of aa'. The
degree
of
utility
is thus
properly
measured
by
the
height
of a
very
narrow
rectangle
corre-
sponding
to a
very
small
quantity
of
food,
which
theoretically ought
to be
infinitely
small.
Distinction between Total
Utility
and
Degree
of Utility.
We are now in a
position fully
to
appreciate
the difference between the total
utility
of
any
commodity
and the
degr^e^ofju^lity
of the com-
modity
at
any point.
These
are,
in
fact,
quan-
tities of
altogether
different
kinds,
the first
being
Theory of Utility.
59
.by.
aji.
area,
and the second
by
a
line. We must consider how we
may express
these notions in
appropriate
mathematical lan-
guage.
Let x
signify,
as is usual in mathematical
books,
the
quantity
which varies
indepen-
dently,
in this case the
quantity
of commo-
dity.
Let u denote the whole
utility proceeding
from the
consumption
of x. Then u will
be,
as
mathematicians
say,
a
function of
x;
that
is,
it
will
vary
in some continuous and
regular,
but
probably
unknown, manner,
when x is made to
vary.
Our
great object,
however,
is to
express ^
the
degree of
utUiiul
_/
V
- '
*s
*-
i ii
ill*"*"
11**'
By prefixing
the
sign
A
to a
quantity,
mathe-
maticians denote that a
very
small
part
of that
quantity
is taken into consideration. Thus
A
a?
means a
very
small
part
of
x,
the
quantity
of
commodity
;
and x
+ A
x therefore means a
very
little more
commodity
than x. Now the
utility
of
X+AX
will be more than that of x as a
general
rule. Let the whole
utility
of x
+ A
x be
denoted
by
u
+
^u;
then it is obvious that the
increment
of
utility
AW
belongs
to the incre-
ment
of
commodity
A
x;
and
if,
for a
moment,
we
suppose
the
degree
of
utility
uniform over
the whole of
A#,
which is
nearly
true
owing
to
60 The
Theory of
Political
Economy.
its
smallness,
we shall find the
corresponding
degree
of utility bv
dividing
AM
hy
A*:/
We find these considerations
fully
illustrated
by Fig.
IV,
in which oa
=
x and ab will be the
degree
of
utility
at the
point
a.
Now,
if we
increase x
by
the small
quantity
aa',
or
A
x,
the
utility may
be considered as increased
by
a
small
rectangle
abb'
a',
or
&u; and,
since a rect-
angle
is the
product
of its
sides,
we find that
the line
ab,
the
degree
of
utility,
is
repre-
sented
by
the fraction
AX
The
utility
of a
commodity may,
however,
be
considered to
vary
with
perfect continuity,
so
that we commit a
small
error in
assuming
it to
be uniform over the whole increment
AX.
To
avoid this we must
imagine
AX
to be reduced
to an
infinitely
small
size,
&u
decreasing
with
it. The smaller the
quantities
are the more
nearly
we shall have a correct
expression
for
ab,
the
degree
of
utility
at the
point
a. Thus
the limit of this fraction
, or,
as it is
AX
commonly expressed,
^-,
is the
degree
of
utility corresponding
to the
quantity
of com-
modity
x_ The
degree of utility
is,
in mathe-
Theory of Utility.
61
matical
language,
the
differential coefficient
of
u considered as a
function of
x,
and will itself
be another function of x.
We shall seldom need to consider the
degree
of
utility except
as
regards
the last increment
which is
consumed,
and I shall therefore com-
monly
use the
expression
final degree of utility
meaning
the
degree
of
utility
of the last addi-
tion,
or the next
possible
addition of a
very
small,
or
infinitely
small,
quantity
to the exist-
ing
stock. In
ordinary circumstances, too,
the
final
degree
of
utility
will not be
great compared
with what it
might
be.
Only
in famine or other
extreme circumstances do we
approach
the
higher degrees
of
utility. Accordingly,
we can
often treat the lower
portions
of the curve of
variation
(pbq,
Fig.
IV)
which concern ordi-
nary
commercial
transactions,
while we leave
out of
sight
the
portions beyond
p
or
q.
It is
also evident that we
may
know the
degree
of
utility
at
any point
while
ignorant
of the total
utility,
that
is,
the area of the whole curve.
The Final
Degree of Utility
and the Law
of
its Variation.
The final
degree
of
utility
is that function
upon
which the whole
Theory
of
Economy
will
62
The
Theory of
Political
Economy.
A be found to
turn. Political
Economists,
gene-
rally speaking,
have failed to discriminate
be-
tween this function and the total
utility.
From
this confusion has arisen much
perplexity. Many
of those commodities which are the most useful
to us are esteemed and desired the least. We
cannot live a
day
without
water,
and
yet
in
ordinary
circumstances we set no value on it.
Why
is this?
Simply
because
(we
usually
have
so much of it that its final
degree
of
utility
is
reduced
nearly
to zero. We
enjoy, every day,
the almost infinite
utility
of
water,
but then we
do not need to consume more than we have.
Let the
supply
run short
by drought,
and we
begin
to feel the
higher degree
of
utility,
of
which we think but little at other
times.)
The variation of the function
expressing
the
final
degree
of
utility
is the
all-important point
in all economical
problems.
We
may
state,
as
a
general
law,
that(it_yjimes~-witk~t^-^^
|
of commodity*
and
ultimately
decreases as that
quantity
.increases^
No
commodity
can be named
which we continue to desire with the same
force,
whatever be the
quantity already
in use
or
possession.
All our
appetites
are
capable
of
satisfaction
or
satiety
sooner or
later,
both these
words
meaning, etymologically,
that we have
Theory of Utility.
63
*-'
had
enough,
so that more is of no use to us.
(^
It
does not
follow, indeed,
that the
degree
of
utility
will
always
sink to zero. This
may
be
the case with
many things, especially
the
simple
animal
requirements,
food, water, air,
&c.)
But
the more refined and intellectual our needs be-
come,
the less are
they capable
of
satiet;j\
To the
desire for articles of
taste, science,
or
curiosity,
when once
excited,
there is
hardly
a limit.)
This
great
^principle
of the ultimate decrease
of the final
pegree
of
utility
of
any commodity
is
implied
in* the
writings
of
many
economists,
though
seldom
distinctly
stated. It is the real
law which lies at the basis of Senior's so-called
'
Law of
Variety/
Indeed,
Senior states the law
itself. He
says
:
'
It is obvious that our desires
do not aim so much at
quantity
as at
diversity.
Not
only
are there limits to the
pleasure
which
commodities of
any given
class can
aiford,
but
the
pleasure
diminishes in a
rapidly increasing
ratio
long
before those limits are reached. Two
articles of the same kind will seldom aiford
twice the
pleasure
of
one,
and still less will
ten
give
five times the
pleasure
of two. In
pro-
portion,
therefore,
as
any
article is
abundant,
the number of those who are
provided
with
it,
and do not wish, or wish but
little,
to increase
64
The
Theory of
Political
Economy.
their
provision,
is
likely
to be
great;
and,
so
far as
they
are
concerned,
the additional
supply
loses
all,
or
nearly
all,
its
utility.
And,
in
pro-
portion
to its
scarcity,
the number of those who
are in want of
it,
and the
degree
in which
they
want
it,
are
likely
to be increased
;
and its
utility,
or,
in other
words,
the
pleasure
which
the
possession
of a
given quantity
of it will
afford,
increases
proportionally
111
/
Banfield's
'
Law of the Subordination of
Wants' also rests
upon
the same basis. I It
cannot be
said,
with
accuracy,
that the satis-
faction of a lower want creates a
higher
want;
it
merely permits
the
higher
want to manifest
itself^J
We distribute our labour and
posses-
sions in such a
way
as to
satisfy
the more
pressing
wants first. If food runs
short,
the
all-absorbing question
is,
how to obtain
more,
because,
at the
moment,
more
pleasure
or
pain
depends upon
food than
upon any
other com-
modity.
But,
when food is
moderately
abund-
ant,
its final
degree
of
utility
falls
very
low,
and wants of a much more
complex
and less
satiable nature become
comparatively promi-
nent.
The
writer, however,
who
appears
to me to
m
'
Encyclopaedia Metropolitana,' p.
133.
Reprint, p.
12.
Theory of Utility.
.65
have most
clearly appreciated
the nature and
importance
of the law of
utility,
is Mr. Richard
Jennings,
who,
in
1855,
published
a small book
called
*
The Natural Elements of Political Eco-
nomy'
11
.
This work treats of the
physical
groundwork
of
Economy, showing
its
depend-
ence on
physiological
laws. It
appears
to me
to
display
a
great insight
into the real basis of
Economy; yet
I am not aware that economists
have bestowed the
slightest
attention on Mr.
Jennings'
views . I take the
liberty,
therefore,
of
giving
a full extract from his remarks on
the nature of
utility.
It will thus be seen that
the
law,
as I state
it,
is no
novelty,
and that it
is
only
careful deduction from
principles_lHLJ>ur
possession
that is needed to
give
us a
-.correct
Theory
of
Economy.
*
To turn from the relative effect of commo-
dities,
in
producing
sensations,
to those which
are
absolute,
or
dependent only
on the
quantity
of each
commodity,
it is but too well known to
every
condition of
men,
that the
degree
of each
sensation which is
produced,
is
by
no means
n
London :
Longmans.
Professor Cairnes
is, however,
an
exception.
See his
'Lectures on the Character and
Logical
Method of Political
Economy.'
London,
1857,
p.
81.
F
66
The
Theory of
Political
Economy.
commensurate with the
quantity
of the com-
modity applied
to' the senses These
effects
require
to be
closely
observed,
because
they
are the foundation of the
changes
of
money
price,
which valuable
objects
command in times
of varied
scarcity
and abundance
;
we shall
therefore direct our attention to them for the
purpose
of
ascertaining
the nature of the law
according
to which the sensations that attend
on
consumption vary
in
degree
with
changes
in the
quantity
of the
commodity
consumed.
'
We
may gaze upon
an
object
until we can no
longer
discern
it,
listen until, we can no
longer
hear,
smell until the sense of odour is
exhausted,
taste until the
object
becomes
nauseous,
and
touch until it becomes
painful
;
we
may
consume
food until we are
fully
satisfied,
and use stimu-
lants until more would cause
pain.
On the
other
hand,
the same
object
offered to the
special
senses for a moderate duration of
time,
and the
same food or stimulants consumed when we are
exhausted or
weary, may convey
much
gratifi-
cation. If the whole
quantity
of the
commodity
consumed
during
the interval of these two states
of
sensation,
the state of
satiety
and the state
of
inanition,
be conceived to be divided into a
number of
equal parts,
each marked with its
Theory of Utility.
67
proper degrees
of
sensation,
the
question
to be
determined will
be,
what relation does the differ-
ence in the
degrees
of the sensation bear to the
difference in the
quantities
of the
commodity?
First,
with
respect
to all
commodities,
our feel-
ings
show that the
degrees
of satisfaction do
not
proceed
pari passu
with the
quantities
con-
sumed
;
they
do not advance
equally
with each
instalment of the
commodity
offered to the
senses,
and then
suddenly stop
;
but diminish
gradually,
until
they ultimately disappear,
and
further instalments can
produce
no further
satisfaction. In this
progressive
scale the incre-
ments of sensation
resulting
from
equal
incre-
ments of the
commodity
are
obviously
less and
less at each
step,
each
degree
of sensation is
less than the
preceding degree. Placing
our-
selves at that middle
point
of
sensation,
the
juste
milieu,
the aurea
mediocritas,
the
apta-rov
neTpov
of
sages,
which is the most usual status
of the mass of
mankind,
and
which, therefore,
is the best
position
that can be chosen for mea-
suring
deviations from the usual
amount,
we
may say
that the law which
expresses
the rela-
tion of
degrees
of sensation to
quantities
of com-
modities is of this character: if the
average
or
temperate quantity
of commodities be
increased,
F 2
68
The
Theory of
Political
Economy.
the satisfaction derived is increased in a less
degree,
and
ultimately
ceases to be increased at
all;
if the
average
or
temperate quantity
be
diminished,
the loss of more and more satisfac-
tion will
continually
ensue,
and the detriment
thence
arising
will
ultimately
become exceed-
ingly great
'
P.
Distribution
of Commodity
in
different
Uses.
The
principles
of
utility may
be illustrated
by considering
the mode in which we distribute
a
commodity
when it is
capable
of several
uses.
There are articles which
may
be
employed
for
many
distinct
purposes
:
thus,
barley may
be used either to make
beer,
spirits,
bread,
or to
feed cattle
;
sugar may
be used to
eat,
or for
producing
alcohol;
timber
may
be used in con-
struction,
or as fuel
;
iron and other metals
may
be
applied
to
many
different
purposes. Imagine,
then,
a
community
in the
possession
of a certain
stock of
barley;
what
principles
will
regulate
their mode of
consuming
it?
Or,
as we have
not
yet
reached the
subject
of
exchange,
ima-
gine
an isolated
family,
or even an
individual,
possessing
an
adequate
stock,
and
using
some
in one
way
and some in
another. The
theory
P
pp.
96-99.
Theory of Utility.
69
of
utility gives, theoretically speaking,
a com-
plete
solution of the
question.
Let s be the whole stock of some
commodity,
and let it be
capable
of/ffiree
distinct uses.
\\
Then we
may represent
the three
quantities
appropriated
to these uses
by
x
lt
y
ly
and z
lt
it
being
a
necessary
condition that x
l
-\-y
l
+
z
l
=
s.}\
The
person may
be conceived as
successively
expending
small
quantities
of the
commodity;
now it is the inevitable
tendency
of human
nature to choose that course which offers the
most
apparent good
at the moment.
Hence,
when the
person
remains satisfied with the dis-
j
_
--
*
__
'II X i
tribution he has
made,
it follows that no alter-
""~111
l<1-~~"
!-
"^^*
ation would
yield
him more
pleasure;
which
amounts to
saying
that an increment of com-
t
modity
would
yield exactly
as much
utility
in
one use as in another. Let
A^I,
Aw
a >
AW
3 ,
be
the increments of
utility arising
from
consuming
one
equal
increment of
commodity
in three dif-
ferent
ways.
When the distribution is com-
pleted,
we
ought
to have
A^I
=
A-M^=
At^;
or
at the limit we have the
equations
_
du
3
dx
"
dy
"
dz
which are true wfien
x]~y
y z,
are
respectively
equal
to x
lt
y
lt Zj.
We
must,
in other
words,
,j
-
.*___
""
I'
70
The
Theory of
Political
Economy.
ihave
the
Jinal degrees of utility
in the three
uses
equal.
We
might
sometimes find these
equations
fail. Even when x is
equal
to
yyv
of the
stock,
its
degree
of
utility might
still exceed
the
utility attaching
to the
remaining
-^o-
part
in either of the other uses. This would mean
that it was
preferable
to
give
the whole com-
modity
to the first use. Such a case
might
perhaps
be said to be not the
exception
but the
rule; for,
whenever a
commodity
is
capable
of
only
one
use,
the circumstance is
theoretically
represented
by saying,
that the final
degree
of
utility
in this
employment always
exceeds that
in
any
other
employment.
Under
peculiar
circumstances
great changes
may
take
place
in the
consumption
of a com-
modity.
In a time of
scarcity
the
utility
of
barley
as food
might
rise so
high
as to exceed
altogether
its
utility,
even as
regards
the small-
est
quantity,
in
producing
alcoholic
liquors;
its
consumption
in the latter
way
would then cease.
In a
besieged
town the
employment
of articles
becomes revolutionised.
Things
of
great utility
in other
respects
are
ruthlessly applied
to
strange purposes.
In Paris a vast stock of
horses were
eaten,
not so much because
they
Theory of Utility.
71
were useless in other
ways,
as because
they
were
needed more
strongly
as food. A certain stock
of horses
had, indeed,
to be retained as a neces-
sary
aid to
locomotion,
so that the
equation
of
the
degrees
of
utility
never
wholly
failed.
Duration
of Utility.
As
utility corresponds
to,
and is measured
by, pleasure produced,
and as
pleasure
is a
quantity
oi two
dimensions,
intensity
and du-
ration,
so
utility
must be conceived as
capable
of duration. In a
great many
cases this is
evidently
true.
Furniture, utensils,
buildings,
books,
gems,
ornaments, &c.,
may
last a
long
time and
possess
more or less
utility
all the
time. If the
degree
of
utility
of
any
such
object
be
constant,
the total amount of
utility
will be
proportional
to the duration. But the
utility may
be more or less
independently
of
the
time,
so that in such cases
utility
is
clearly
a
quantity
of three dimensions. We have seen
(p. 56)
that
ujj^ty
has
two
dijMjgflgjpLS
depend-
ing upon
the
Quantity
of
commodity enjoyed
and the final
okgree
of its
utility.
I
We must
now add a third dimension
depending upon
the
length
of time
during
which
the
p.ojmnodjfy
can
retain its useful
qualities.
)
We have more or
72 The
Theory of
Political
Economy.
less need of a
thing;
we
may
be more or less
fully supplied
with that
thing;
and can
enjoy
it a
longer
or shorter time.
Actual,
Prospective,
and Potential
Utility.
^The
difficulties of Political
Economy
are
mainly
the difficulties of
conceiving clearly
and
fully
the conditions of
utility^)
Even at the
risk of
being
tiresome,
I will therefore more
minutely point
out how various are the senses
in which a
thing may
be said to have
utility.
It is
quite
usual,
and
perhaps
correct,
to call
iron or water or timber a useful substance
;
but
we
may
mean
by
these words at least three
distinct facts.
|_We
may
mean that a
particular
piece
of iron is at the
present
moment
actually
useful to some
person;
or
that,
although
not
actually
useful,
it is
expected
to be useful at a
future time
;
or we
may only
mean that it would
be useful if it were in the
possession
of some
person needing
itTlThe
mm^ajy^
ofji^
railway,
the iron which
composes
the Britannia
Bridge,
or
an
_
ocean
steamer,
is
actually
useful;
the
^^^"^^^^MMMMMi^"""^*
'
"^^mmii^^
iron
lying
in a merchant's store is
jiotugejal
at
present, though
it is
expected
soon
to be
so;
but there is a vast
quantity
of iron
existing
in
the
bowels
of the
earth,
which has all the
Theory of
Utility.
73
physical properties
of
iron,
and
might
be useful if
extracted,
though
it never will be. These are in-
stances of
ac^nl^rtrjiiKr^ctiv^
and
potential utility,
It will be
apparent
that
potential
utility
does
not
really
enter into the
science of Political
Economy,
and when I
speak
of
utility simply,
I do not mean the term to include
potential
utility.
It is a
question
of
physical
science
whether a substance
possesses qualities
which
might
make it suitable to our needs if it were
within our reach.
Only
when there arises
some
degree
of
probability,
however
slight,
that
a
particular object
will be
needed,
does it ac-
quire
prospective utility capable
of
rendering
it
a desirable
possession.
But a
very large part
in
industry,
and the science of
industry, belongs
to
prospective utility.
We can at
any
one mo-
ment use
only
a
very
small
part
of what we
possess. By
far the
greater part
of what we
hold
might
be allowed to
perish
at
any
mo-
ment,
without
harm,
if we could have it re-
created with
equal
ease at a future
moment,
when need of it arises.
We
might
also
distinguish,
as is
customary
with French
economists,
between direct and in-
direct
utility.
Direct
utility
attaches to a
thing
like food which
we can
actually apply
to
satisfy
74
The
Theory of
Political
Economy.
our wants. But
things
which have no direct
utility may
be the means of
procuring
us such
by exchange,
and
they may
therefore be said to
have indirect
utility
<i. To the latter form of
utility
I have elsewhere
applied
the name ac-
quired utility
r
. This distinction is not the same
as that which is made in the
Theory
of
Capital
between mediate and immediate
utility,
the for-
mer
being
that of
any implement,
machine,
or
other means of
procuring
commodities
possess-
ing
immediate and direct
utility
that
is,
the
power
of
satisfying
want
8
.
The most
advantageous
Distribution
of
a
Commodity from
time to time.
We have seen that when a
commodity
is
capable
of
being
used for different
purposes,
definite
principles regulate
its
application
to
those
purposes.
A similar
question
arises when
a stock of
commodity
is in
hand,
and must be
expended
over a certain interval of time more
or less definite. The science of
Economy
must
point
out the mode of
consuming
it to the
greatest advantage
that
is,
with a maximum
of
utility.
If we reckon all future
pleasures
q
Gamier,
'
Traite* d'Economie
Politique,'
5me ed.
p.
11.
'
See
Chapter
IV. See
Chapter
VII.
Theory of Utility.
75
and
pains
as if
they
were
present,
the solution
will be
exactly
the same as in the case of dif-
ferent uses. If a
commodity
has to be distri
buted over n
days' use,
and v-,. ..
ftc. fte
final
degrees
of
utility
on each
day's consump
than
we
ought.
Hparly
to
It
may,
however,
be uncertain
during
how
many days
we
may require
the stock to last.
The
commodity mightJ>e
of a perishable nature,
so that if we
keep
some of it for ten
days,
it
might
become
unserviceable,
and its
utility
be
sacrificed.
Assuming
that we can estimate
more or less
exactly
the
probability
of its re-
maining good,
let
PI p
z
PS
-
PIQ
be these
probabilities.
Then,
on tha
principle (p. 42)
that a
future pleasure r
flfli"
must hp.
reduced in
pro-
portion
to its want of
certainty,
we have the
equa-
tions
"general
result
jg^jbhat
less,
the
commodity
a
spig"H
tn P.a/h
c\^y
is
less,!
1
,
,.
"
...
.
\\
so that
^^jyili
hp
grflat?
1
!
So far we have taken no account of the
vary-
ing
influence of an event
according
to its
propin-
quity
or remoteness. The distribution of com-
modity
described is that which should be made
and would be made
by
a
being
of
perfect good
76
The
Theory of
Political
Economy.
sense and
foresight.
To secure a maximum of
benefit in
life,
all future
events,
all future
plea-
sures or
pains,
should act
upon
us with the
same force as if
they
were
present,
allowance
being
made for their
uncertainty.
The factor
expressing
the effect of remoteness
should,
in
short,
always
be
unity,
so that tune should have
no
effect. But no human mind is constituted
in this
perfect way
: a future
feeling
is
always
less influential than a
present
one. To take
this fact into
account,
let
q
l}
q
2
,
g
3
,
&c. be the
undetermined fractions which
express
the ratios
of the
present pleasures
or
pains
to those future
ones from whose
anticipation they
arise.
Having
a stock of
commodity
in
hand,
our
tendency
will
be to distribute it so that the
following equa-
tions will hold true
tt will be an obvious
consequence
of these
equations
that less
commodity
will be
assigned
to future
days
in some
proportion
to the inter-
vening
time.
An
interesting problem, involving questions
of
prospective utility
and
probability,
is found
in the case of a vessel at
sea,
which is insuffi-
ciently
victualled for the
probable
length
of
voyage
to the nearest
port.
The actual
length
Theory of Utility.
77
of the
voyage depends
on the
winds,
and must
be uncertain
;
but we
may suppose
that it will
almost
certainly
last ten
days
or
more,
but not
more than
thirty days.
It is
apparent
that if
the food were divided into
thirty equal parts,
partial
famine and
suffering
would be
certainly
endured for the first ten
days,
to ward off later
evils which
may very probably
not be encoun-
tered. To consume one-tenth
part
of the food
on each of the first ten
days
would be still
worse,
as almost
certainly entailing
starvation
on the
following days.
To determine the most
beneficial distribution of the
food,
we should
require
to know the
probability
of each
day
be-
tween the tenth and thirtieth
days forming part
of the
voyage,
and also the law of variation of
the
degree
of
utility
of food. The whole stock
ought
then to be divided into
thirty/portions,
allotted to each of the
thirty days,
and of such
magnitude
that the final
degrees
of
utility
mul-
tiplied by
the
probabilities
are all
equal.
Thus,
let v
lt
v
z
,
v
3
,
&c. be the final
degrees
of
utility
of the
first, second, third,
and other
days sup-
plied,
and
p
lt
p
z
,
p
s
,
&c. the
probabilities
that
the
days
in
question
will form
part
of the
voyage
;
then we
ought
to have
Pi ^l=Pz
V
Z
=
p
B ,...
=
p
w
^29=^30
V
30
.
78
The
Theory of
Political
Economy.
If these
equations
did not
hold,
it would be
beneficial to transfer a small
portion
from one
lot to some other lot. As the
voyage
is
sup-
posed certainly
to last the first ten
days,
we
have
Pi
=
p*=
. .
=jpio
=
l;
hence we must have
V
l
=
V
2
=
. . . =V
10 ;
whence it will follow that the allotments to the
first ten
days
should be
equal. They
should
afterwards decrease
according
to some
regular
law;
for,
as the
probability
decreases,
the final
degree
of
utility
should increase in inverse
proportion.
CHAPTER IV.
THEORY OF EXCHANGE.
Importance of Exchange
in
Economy.
EXCHANGE is so
important
a
process
in the
maximising
of
utility
and the
saving
of
labour,
that some economists have
regarded
their
science as
treating
of this
operation
alone.
Utility
arises from commodities
being brought
in suitable
quantities
and at the
proper
times
into the
possession
of
persons needing
them
;
and
it is
by exchange,
more than
any
other
means,
that this is fiffop.t.p!fL
Trade
is not in-
deed the
only
method of
Economy:
a
single
individual
may gain
in
utility by
a
proper
con-
suinption
of the stock in his
possession.
The
best
employment
of labour and
capital by
a
80
The
Theory of
Political
Economy.
single person
is also a
question
disconnected
from that of
exchange,
and which must
yet
be
treated in the
science.
But,
with these
excep-
tions,
I am
perfectly willing
to
agree
with the
high importance
attributed to
exchange.
It-is
impossible
to ha.vft
a
correct idea of the
^science of
Economy
without, a
pprfcpf.
hensinn of f.hft
Theory
of
F/yphflngP
and I find
it both
possible
and desirable to consider this
subject
before
introducing any
notions concern-
ing
labour or the
production
of commodities.
In these words of Mr. Mill I
thoroughly
concur:
'
Almost
every speculation respecting
the eco-
nomical interests of a
society
thus
constituted,
implies
some
theory
of value : the smallest error
on that
subject
infects with
corresponding
error
all our other
conclusions;
and
anything vague
or
misty
in our
conception
of
it,
creates confu-
sion and
uncertainty
in
everything
else.' But
when he
proceeds
to
say,
'
Happily,
there is
nothing
in the laws of Value which remains
for the
present
or
any
future writer to clear
up
;
the
theory
of the
subject
is
complete
'
a
he
utters that which it would be rash to
say
of
any
of the sciences.
a
'
Principles
of Political
Economy,'
book iii.
chap.
i. i.
Theory of Exchange.
81
Ambiguity of
the term
Value,
and
proposed
introduction
of
the
expression
Ratio
of Exchange.
I
must,
in the first
place, point
out the
thoroughly ambiguous
and unscientific
charac-
ter of the term
value. Adam Smith noticed the
extreme difference of
meaning
between value in
ue and value in
exchange
;
and it is usual for
the best writers on
Economy
to caution their
readers
against
the confusion to which
they
are
liable. But I do not believe that either writers
or readers can avoid the confusion so
long
as
they
use the word. In
spite
of the most acute
feeling
of the
danger,
I often detect
myself
using
the word
improperly;
nor do
I think
that
the best authorities in
Economy escape
the
danger.
Let us turn to
Mr^MilTs_
definition of Value
b
,
and we at once see the weakness of the term.
He tells us
'
Value is a relative term. The
value of a
thing
means the
quantity
of
some
other
thing,
or of
things
in
general,
which it ex-
changes
for/
Now,
if there is
any
fact
certain
about
value,
it
is,
that it means not an
object at
b
'
Principles
of Political
Economy,'
book
iii,
chap,
6,
G
82
The
Theory of
Political
Economy.
all,
but a
quality,
attribute,
or
rather
a
cjrcum-
stance,
.of,
an^oiyeet/
Value
implies,
jn^fact,
a
relation
;
but if
SQ
I
\t
canno^Tpossibly
be some
other
tjiing.
A student of
Economy
has
no.
hope
of ever
being
cleaiFa^d
correct in his ideas of
the science if he thinks of value as at all a
thing
or
object,
or even as
anything
which lies
in a
thing
or
object/
Persons are thus led to
speak
of such a
nonentity
as intrinsic value.
There
are, doubtless,
qualities
inherent in such
a substance as
gold
or iron which influence its
\\value;
but the word
Value,
so far as it can be
correctly
used,
merely expresses
the circumstance
rf
its
exchanging
in a certain ratio
for
some
yther substance. If a ton of
pig-iron exchanges
in a market for an ounce of standard
gold,
Tipiithpr
the iron is value, nor the
gold:
nor is
there value in the iron nor in the
gold.
The
notion of value is concerned
only
in the fact or
circumstance of one
exchanging
for the other.
Thus it is
scientifically
incorrect to
say
that
the value of the ton of iron is the ounce of
gold
: we thus convert value into a concrete
\,
thing;
and it
is,
of
course,
equally
incorrect
to
say
that the value of
the ounce of
gold
is
\
thft^tQp of jrofl/
The more correct and safe
expression is,
that
^
ya^e
nf
fay
frT
*
Theory of Exchange.
83
is
equal
to the value
of
the ounce
of gold,
or
j|
that their values are as one to one.
Value in
exchange expresses
nothing
but a K
ratio,
and the term should not be used in
any
li
other
sense. To
speak simply
of the value of
an ounce of
gold
is as absurd as to
speak
of the
ratio
of
the number seventeen. What is the ratio
of the number seventeen ? The
question
admits
no
answer,
for there must be another number
named in order to make a ratio
;
and the ratio
will differ
according
to the number
suggested.
What is the value of iron
compared
with that
of
gold
? is an
intelligible question.
The answer
consists in
stating
the ratio
of the
quantities
exchanged.
In the
popular
use of the word Value there is
inextricable confusion with the notion of
utility
;
and the conclusion to which I shall
come,
that
exchange
does
depend
entirejy
on
degrees
of
utility, gives
some
countenance^o^^he-^onftr^
sion. To avoiaTall
difficulty,
I shall discontinue!I
the use of the word Value
altogether,
and sub-U
stitute the
unequivocal expression
Ratioof
Ex-
jl
change.
When we
speak
of theratio of ex-
change
of
pig-iron
and
gold,
there can be
_no
possible
doubt that we mean
merely
the
quan-
tity
of one
given
for the other.
G 2
84 The
Theory of
Political
Economy.
Definitions
of
Market and
Trading
Body.
Before
proceeding
to the
Theory
of
Exchange,
it will be desirable to
place beyond
doubt
the
meanings
of two other terms which I shall
fre-
quently employ.
By
a Market I shall mean much what com-
mercial men use it to
express. Originally
a
market was a
public place
in a town where
provisions
and other
objects
were
exposed
for
sale
;
but the word has been
generalised,
so as to
mean
any body
of
persons
who are in intimate
business relations and
carry
on extensive trans-
actions -in
any commodity.
A
great city may
contain as
many
markets as there are
import-
ant
branches
of
trade,
and these markets
may
or
may
not be localised. The central
point
of a
market is the
public exchange,
mart or auc-
tion
rooms,
where the traders
agree
to meet
and transact business. In
London,
the Stock
Market,
the Corn
Market,
the Coal
Market,
the
Sugar
Market,
and
many
others,
are
distinctly
localised
;
in
Manchester,
the Cotton
Market,
the Cotton Waste
Market,
and others. But this
distinction of
locality
is not
necessary.
The
traders
may
be
spread
over a whole
town,
or
region
of
country,
and
yet
make'a
market,
if
Theory of Exchange.
85
they
are,
by
means of
fairs,
meetings, published
price
lists,
the
post
office,
or
otherwise,
in close
communication with each other.
Thus,
the com-
mon
expression Money
Market denotes no loca-
lity
: it is
applied
to the
aggregate
of those
bankers,
capitalists,
and other traders who lend
or borrow
money,
and who
constantly exchange
information
concerning
the course of business.
In Political
Economy
we
may usefully adopt
this term with a clear and well-defined mean-
ing. By
a market I shall mean two or more
persons
dealing
in two or more commodities,
whose stocks of those commodities and inten-
tions of
exchanging
are known to all. It is
also essential that the ratio of
exchange
be-
tween
any
two
persons
should be known to all
the others. It is
only
so far as this
community
'
of
knowledge
extends that the market extends.
Any persons
who are not
acquainted
at the
moment with the
prevailing
ratio of
exchange,
and whose stocks are not available for want of
communication,
must not be considered
part
of
the market. Secret or unknown stocks of a
commodity
must also be considered
beyond
reach of a market so
long
as
they
remain secret
and unknown.
Every
individual must be con-
sidered as
exchanging
from a
pure
regard
to his
86 The
Theory of
Political
Economy.
own
requirements
or
private
interests,
and there
must be
perfectly
free
competition,
so that
any
one will
exchange
with
any
one else
upon
the
slightest advantage appearing.
There must be
no
conspiracies
for
absorbing
and
holding sup-
plies
to
profiling
nrmfl.tnrfll ratios of
exchange.
Were a
conspiracy
of farmers to withhold all
corn from
market,
the consumers
might
be
driven,
by
starvation,
to
pay prices bearing
no
proper
relation to the
existing supplies,
and
the
ordinary
conditions of the market would be
thus
overthrown.
The theoretical
conception
of a
perfect
mar-
ket is more or less
completely
carried out in
practice.
Tt is the
work of brokers in
any
ex-
tensive market to
organise
the
exchanges,
so
that
every purchase
shall be made with the
jnost
thorough acquaintance
with the conditions
of the trade. Each broker strives to have the
best
knowledge
of the conditions of
supply
and
demand, and the earliest intimation of
any
change.
He is in communication with as
many
other
tracers
as
possible,
in order to have the
widest,
range
nf
information,
and the
greatest
fthanrft
of
making suitable
exchanges.
It is
only
thus that a definite market
price
can
hp
ascertained at
every
moment,
and varied
Theory of Exchange.
87
according
to the
frequent
news
capable
of affect-
ing buyers
and sellers.
By
the mediation of a
body
of brokers a
complete
consensus is estab-
lished,
and the stocks of
every
seller or the
demands of
every buyer
are
brought
into the
market. It is of the
very
essence of trade to
have wide and constant information. A mar-
ket, then,
is
theoretically perfect
only
when all
traders have
perfect knowledge
of the condi-
tions of
supply
and
demand,
and the conse-
quent
ratio of
exchange
;
and in such a
market,
as we shall now see, iherexcanoniy oe one"ratio
of
exchange
of^one
uniform
commodity
at
any
moment.
So essential is a
knowledge
of the real state
of
supply
and demand to the smooth
procedure
of trade and the real
good
of the
community,
that I conceive it would be
quite legitimate
to
compel
the
publication
of
any requisite
statis-
tics.
Secrecy
can
only
conduce_to~4he
profit
of
I
speculators
who
gain
from
great
fluctuations of
prices. Speculation
is
advantageous
to the
public
o"nty
so far as it tends to
equalise prices;
and
it
is, therefore,
against
the
public good
to allow
speculators
to foster
artificially
the
inequalities
of
prices by
which
they profit.
The welfare
of millions both of consumers and
producers
88
The
Theory of
Political
Economy.
depends upon
an accurate
knowledge
of the
stocks of cotton and corn
;
and it
would,
there-
fore,
be no unwarrantable interference with the
liberty
of the
subject
to
require any
informa-
tion as to the stocks in hand. In
Billingsgate
fish market it has been a
regulation
that sales-
men shall fix
up
in a
conspicuous place every
morning
a statement of the kind and amount
of their stock
c
;
and such a
regulation,
whenever
it could be enforced on other
markets,
would
always
be to the
advantage
of
every
one
except
a few traders.
I find it
necessary
to
adopt
some
expression
for
any
number of
people
whose
aggregate
in-
fluence in a
market,
either in the
way
of
supply
,or
demand,
we have to consider.
By
a
trading
Jmdg.1
mean,
in the most
general
manner,
any
body
either of
buyers
or sellers. The
trading-
l)ody may
be a
single
individual in one case
;
it
may
be the whole inhabitants of a continent
in another
;
it
may
be the individuals of a trade
diffused
through
a
country
in a third.
England
and North America will be
trading
bodies if
we are
considering
the corn we receive from
America in
exchange
for iron and other
goods.
The continent of
Europe
is a
trading body
as
c
Waterston's
'
Cyclopaedia
of
Commerce,'
ed.
1846,
p.
466.
Theory of Exchange.
89
purchasing
coal from
England.
The farmers of
England
are a
trading body
when
they
sell corn
to the
millers,
and the millers both when
they
buy
corn from the farmers and sell flour to the
bakers.
I use the
expression
with this
very
wide
meaning,
because the
principles
of
exchange
are the same in nature, however wide or nar-
row
may
be the market considered.
Every
trading body
is either an individual or an
ag-
gregate
of
individuals,
and the
law,
in the case
^^^^^^^^^^^^^
^""""^^mM^
^'^^'^^^^MMMw^bv^MMaMMM^iMn^
of the
aggregate,
must
depend upon
the fulfil-
ment of law in the individuals. We cannot
usually
observe
any precise
and continuous vari-
ation in the wants and deeds of an
individual,
because the action of extraneous
motives,
or
what would seem to be
caprice,
overwhelms
minute tendencies. As I have
already
re-
marked
(p. 22),
a
single
individual does not
vary
his
consumption
of
sugar,
butter,
or
eggs
from week to week
by
infinitesimal
amounts,
according
to each small
change
in the
price.
He
probably
continues his
ordinary consump-
tion until accident directs his attention to a
rise in
price,
and he
then,
perhaps,
discontinues
the use of the articles
altogether
for a
time.
But the
aggregate,
or what is the
same,
the
90 The
Theory of
Political
Economy.
average consumption
of a
large community
will
be found to
vary continuously
in a more or less
rapid
manner. The most minute tendencies
make themselves
apparent
in a wide
average.
Thus,
our laws of
Economy
will be
theoretically
true in the case of
individuals,
and
practically
true in the case of
large aggregates
;
and the
general principles
will be the
same,
whatever
the extent of the
trading body
considered. I
am
justified,
then,
in
using
the
expression
with
the utmost
generality.
At the same
time,
it would be an obvious
error to
suppose
that the
particular
character
of an economical law
holding
true of a
great
aggregate
will be
exactly
the same as that of
any
individual.
Only
when the individuals
are of
perfectly
uniform character w
r
ill their
average supply
or demand for
any commodity
represent
that of an individual.
But
every
community
is
usually composed
of individuals
differing widely
in
powers,
wants, habits,
and
possessions.
An
average
will therefore
partly
depend upon
the
comparative
numbers
belong-
ing
to each class.
Theory of Exchange.
91
Of
the Ratio
of Exchange.
When a
commodity
is
perfectly
uniform or
homogeneous
in
quality,
all
portions may
be
indifferently
used in
place
of
equal portions
:
hence,
in the
same
market,
and at the same
moment
all
portions
must be
exchanged
at the
same ratio. There can be no reason
why
a
per-
\
son should treat
exactly
similar
things
differ-
ently__and
the
slightest
excess in what is de-
manded for one over the other will cause him
to take the latter instead of the former. In
nicely-balanced exchanges
it is a
very
minute
scruple
which will turn the scale and
govern
the choice,
.ft.
minute difference of
quality
in
a
commodity may
thus
give
rise to
preference,
and cause the ratio of
exchange
to differ.
But
where no difference exists at
all,
or where no
difference is known to
exist,
there can be no
ground
for
preference
whatever.
If,
in
selling
a
quantity
of
perfectly equal
and uniform barrels
of
flour,
a merchant
arbitrarily
fixed different
prices
on
them,
a
purchaser
would of course
select the
cheaper
ones;
and where there was
absolutely
no difference in the
thing purchased,
even a
penny
in the
price might
be a valid
92 The
Theory of
Political
Economy.
ground
of choice. Hence follows what is un-
doubtedly
true,
with
proper explanations,
that
}
in the same
open
market,
at
any
moment,
there
i cannot be two
prices for
the same kind
of
article.
Such differences as
may practically
occur arise
from extraneous
circumstances,
such as the_ de-
fective credit,
of the
purchasers,
their
imperfect
frn
owl
edge
of the
market.,
and so on.
Though
the
price
of the same
commodity
must be uniform at
any
one
moment,
it
may
vary
from moment to
moment,
and must be
conceived as in a state of continual
change.
Theoretically speaking,
it
may
not be
possible
to
buy
two
portions
of the same
commodity
:'
successively
ftt
the same ratio of
eyr,hange
3
be-
cause, no sooner has the first
portion
been
j
bought
than the conditions
of
utility
are
al-
terexL
When
exchanges
are made on a
large
scale,
this
result will
he verified in
praptire-
If
a
wealthy person
invested
100,000
in the funds
in the
morning,
it is
hardly likely
that the
operation
could be
repeated
in the afternoon at
the.
same
price.
In
any
market,
if a
person
goes
on
buying largely,
he will
n1t.ima.tely
raise
the
price against
himself
Thus it is
apparent
that extensive
purchases
would best be made
gradually,
so as to secure the
advantage
of a
Theory of Exchange.
93
lower
price upon
the earlier
portions.
In
theory
this effect of
exchange upon
the ratio of ex-
change
must he conceived to exist in some
degree,
however small
may
be the
purchases
made.
Strictly speaking,
the ratio of
exchange"
at
any
moment is that of
dy
to
dx,
of an infi-
nitely
small
quantity
of one
commodity
to the
infinitely
small
quantity
of another which is
given
for it. The
rajiQ^-^.-epteJiage-
4s
really
a differential coefficient. The
quantity
of
any
article
purchased
is a function of the
price
with
which it is
purchased,
and the ratio of ex-
change expresses
the rate at which the
quan-
tity
of the article increases
compared
with what
is
given
for it.
We must
carefully distinguish,
at the same
time,
between the
Statics_and_Dynamics
of this
subject.
The real condition of
industry
is one
of
perpetual
motion and
change.
Commodities
are
continually being
manufactured and ex-
changed
and consumed. If we wished to have
a
complete
solution of the
problem
in
all its
natural
complexity,
we should have to treat it
as a
problem
of
dynamics.
But it would
surely
be absurd to
attempt
the more difficult
question
when the more
easy
one is
yet
so
imperfectly
within oUr
power.
It is
only
as a
purely
statical
94
The
TJieory of
Political
Economy.
problem
that I can venture to treat the ac-
tion of
exchange. JJolders
of
commodities
will
be
regarded
not
as/ continuously passing
on
these commodities in
streams of
trade,
but as
possessing
certain fixed amounts which
they
exhange_until
they^come
to
equilibrium.
It is much more
easy
to determine the
point
at which a
pendulum
will come to rest than to
calculate the
velocity
at which it will move
when
displaced
from that
point
of rest. Just
,
so,
it is
a^Xar
mqrejeasy
task to
lay
down the
conditions under which trade is
completed
and
interchange
ceases,
than to
attempt
to ascertain
|
at what rate trade will
go
on when
equilibrium
is not attained.
The difference will
present
itself in this form :
dynamically
we could not treat the ratio of ex-
change
otherwise than as the ratio of
dy
and
dx,
infinitesimal
quantities
of
commodity
;
but
in the statical view of the
question
we can sub-
stitute the ratio of the finite
quantities y
and x.
Thus,
from the self-evident
principle,
stated on
pp.
91-2,
that there
cannot,
in the
.same market,
at the same
moment,
be
two different
prices
for
the same uniform
commodity,
it follows that
/ the last increments in an act
of
exchange
must
I
he
exchanged
in the same ratio as the whole
Theory of Exchange.
quantities
exchanged.
Suppose
that two coi
modities are bartered in the ratio of x for
then
every
m
th
part
of x is
given
for the m
th
part
of
y,
and it does not matter for which of
the m
th
parts.
No
part
of the
commodity
can
be treated
differently
to
any
other. We
may
carry
this division to an indefinite extent
by
imagining
m to be
constantly
increased,
so
that,
at the
limit,
even an
infinitely
small
part
of x
must be
exchanged
for an
infinitely
small
part
of
y,
in the same ratio as the whole
quantities.
This result we
may express by stating
that the
increments concerned in the
process
of
exchange
must
obey
the
equation
ll
^
=2.
dx x
The use which we shall make of this
equation
will be seen in the next section.
The
Theory of Exchange.
_The keystone
of the whole
Theory
of Ex-
change,
and of the
principal problems
in Poli-
tical
Economy,
lies in this
proposition
The
.
ratio of
exchange of any
two commodities
will
]be
inversely
as the final
degrees of utility of
the
qvantities of commodity
available
for consump-
96
The
Theory of
Political
Economy.
tion
after
the
exchange
is
effected.
When the
reader has reflected a little
upon
the
meaning
of this
proposition,
he will
see,
I
think,
that it
is
necessarily
true,
if the
principles
of human
nature have been
correctly represented
in
pre-
vious
pages.
Imagine,
for a
moment,
that there is one
trading body possessing
only corn,
and another
possessing only
beef. It is certain that, under
these circumstances,
a
portion
of the corn
may
be
given
in
exchange
for a
portion
of the beef
with a
considerable increase of
utility.
How
are we to determine at what
point
the ex-
change
will cease to be beneficial?
This
ques-
tion must involve both the ratio of
exchange
and the
degrees
of
utility. Suppose,
for a
moment,
that the ratio of
exchange
is
approxi-
mately
that of ten
pounds
of corn for one
pound
of beef :
then, if
to the
trading body
which
possesses
corn
f
ten
pound
a of corn are
less useful than one of
beefj
that
body
will
desire to
carry
the
ftxr.ha.ngp
further.
^Should
the other
body possessing
beef find one
pound
less useful than ten
pounds
of corn, this
body
will also be desirous to continue the exchange.
ExchangeL
Will thl^
g^
nn t.ill encln
party
has
obtained
all the benefit that
is
possible,
and
Theory of Exchange.
97
loss of
utility
would result if more were ex-
changed.
Both
parties,
then,
rest in satisfac-
tion and
equilibrium,
and the
degrees
of
utility
have come to their
level,
as it were.
This point of
equilibrium
will be known
by
the
criterion,
that an
infinitely
small amount
of
commodity pyr.hfl.ngfifl
jn
addition,
at the
same
ra.te,
will
bring
neither
gain
nor loss of
utility.
In other
words,
if increments of com-
modities be
exchanged
at the established ratio,
their utilities will be
equal
for both
parties.
Thus,
if ten
pounds
of corn were of
exactly
the same
utility
as one
pound
of
beef,
there
would be neither harm nor
good
in farther
exchange
at this ratio.
It would be
hardly possible
to
represent
this
theory completely
in a
diagram,
but the accom-
panying
figure may, perhaps,
render it clearer.
The line
pqr
is a small
portion
of the curve of
utility
of one
commodity,
while the broken line
98 The
Theory of
Political
Economy.
p'qr'
is the like curve of another
commodity
which has been reversed and
superposed
on the
other.
Owing
to this
reversal,
the
quantities
of the first
commodity
are measured
along
the
base line from a towards
6,
whereas those of
the second must be measured in the
opposite
direction. Let units of both commodities be
represented by equal lengths:
then the little
line a'a indicates an increase of the first com-
modity,
and a decrease of the second. Assume
the ratio of
exchange
to be that of unit for
unit,
or 1 to 1
:
then,
by receiving
the commo-
dity
a'a the
person
will
gain
the
utility
ad,
and
lose the
utility
a'c
;
or he will make a net
gain
of the
utility
corresponding
to the curvilinear
figure
cd.
/He
will, therefore,
wish to extend
the
exchange.
If he were to
go up
to the
point
&',
and were still
proceeding,
he
would,
by
the
next small
exchange, gain
the
utility
be,
and
lose
&'/;
or he woul i have a net loss of
ef.
He
would, therefore,
have
gone
to
far/
and it is
pretty
obvious that the
point
of
intersection,
q,
defines the
place
where he would
stop
with the
greatest advantage.
It is there that a net
gain
is converted into a net
loss,
or rather
where,
for
an
indefinitely
small
quantity,
there is neither
gain
nor loss. To
represent
an
indefinitely
small
Theory of Exchange.
99
quantity,
or even an
exceedingly
small
quan-
tity,
on a
diagram
is,
of
course,
impossible
;
but
on either side of the line
mq
I have
represented
the utilities of a small
quantity
of
commodity
more or
less,
and it is
apparent
that the net
gain
or loss
upon
the
exchange
of these
quan-
tities would be
comparatively trifling.
Symbolic
Statement
of
the
Theory.
To
represent
this
process
of
reasoning
in
sym-
bols,
let
A# denote a small increment of
corn,
and
Ay
a small increment of beef
exchanged
for it. Now our
principle
of
uniformity
comes
into
play.
As both the corn and the beef are
homogeneous commodities,
no
parts
can be ex-
changed
at a different ratio from other
parts
in the same market :
hence,
if x be the whole
quantity
of corn
given
for
y,
the whole
quantity
of beef
received,
A^
must have the same ratio
to
ACC
as
y
to
x; or,
we have
^
= -, or
AV=-AiC.
AX
X X
Now,
in a state of
equilibrium,
the utilities of
these increments must be
equal
in the case of
each
party,
in order that neither more nor less
exchange
would be desirable : hence the
utility
H 2
100 The
Theory of
Political
Economy.
per
unit of beef must be
-
times that of corn
;
x
or,
considering
the increments as
infinitely
small,
the
degrees
of
utility
will be
inversely
as the
magnitudes
of the increments.
Let us now
suppose
that the first
body,
A,
originally possessed
the
quantity
a of
corn,
and
that the second
body,
B,
possessed
the
quantity
b of beef. As the
exchange
consists in
giving
x of corn for
y
of
beef,
the state of
things
after
exchange
will be as follows :
A holds a x of
corn,
and
y
of beef.
B x of
corn,
and b
y
of beef.
Let
<i(a x)
denote the final
degree
of
utility
of corn to
A,
and
<
a
e the
corresponding
func-
tion for B. Also let
^y
denote A's final de-
gree
of
utility
for
beef,
and
^ (by)
B's similar
function.
Then,
as
explained
on
pp.
95-98,
A
will not be satisfied unless the
following equa-
tion holds true
or
^
^y
dx'
Hence,
substituting
for the second member
by
the
equation given
on
p.
95,
we have
x
Theory of Exchange.
What holds true of A will also hold true of
B,
mutatis mutandis. He must also derive
exactly equal utility
from the final
increments,
otherwise it will be for his interest to
exchange
either more or
less;
and he will disturb the
conditions of
exchange.
Hence the
following
equation
must hold true
\|/-a
(b y)
.
dy
=
<p%
x . dx
;
or,
substituting
as
before,
We
arrive, then,
at the
conclusion,
that when-
ever^
two
coinmodities_are
^xchanged__or__each>
other,
and more or less can be
given
or received
in
indefinitely
small
quantities,
the
quantities
exchanged satisfy
two
equations,
which
may
be thus stated in a concise form
-x)_
y
_
<
The two
equations
are sufficient to determine
the results of
exchange
;
for there are
only
two unknown
quantities
concerned,
namely,
x
and
y,
the
quantities given
and received.
A
vague
notion has existed in the minds of
economical
writers,
that the conditions of ex-
change may
be
expressed
in the form of an
102 The
Theory of
Political
Economy.
equation.
Thus,
Mr. Mill has said
d
:
'
The idea
of a
ratio,
as between demand and
supply,
is
out of
place,
and has no concern in the matter :
the
proper
mathematical
analogy
is that of an
equation.
Demand and
supply,
the
quantity
demanded and the
quantity supplied,
will be
made
equal/
Mr. Mill here
speaks
of an
equa-
tion as
only
a
proper
mathematical
analogy.
But if Political
Economy
is to be a real science
at
all,
it must not deal with
analogies
;
it must
reason
by
real
equations
like all the other
sciences which have reached at all a
system-
atic character.
But,
after
all,
Mr. Mill's
equation
is a different one from those at which we have
arrived
above;
it consists in
stating
that the
quantity
x
given by
A is
equal
to the
quantity
x received
by
B. But this must
necessarily
be
the case if
any exchange
takes
place
at all.
The
theory
of
value, as^
expounded
by
Mr.
Mill,
fails to reach the
rootjof
the
matter,
and show
how the
jtmount
of demand or
supplyTs^
caused
^p_jvary.
And Mr. Mill does not
perceive
that,
as there must be two
parties
and two
quanti-
ties to
every exchange,
there must be two
equations.
Nevertheless,
the
theory
is
perfectly
consistent with the laws of
supply
and demand
;
d
'
Principles
of Political
Economy/
book iii.
chap.
2,
4.
Theory of Exchange.
103
and if we had the functions of
utility
deter-
mined,
it would be
possible
to throw them
into a form
clearly expressing
the
equivalence
of
supply
and
demand.
We
may regard
x as the
quantity
demanded /
on one side and
supplied
on the
other;
simi-/
larly,
y
is the
quantity supplied
on the
one/
side and
demanded on the other.
Now,
whe
we hold the two
equations
to be simultaneous!
true,
we assume that the x and
y
of one
equa
tion
equal
those of the other.
The laws of
supply
and demand are thus a
result of what seems to me the true
theory
of
value or
exchange.
U
Impediments
to
Exchange.
We have hitherto treated the
theory
as if the
action of
exchange
could be carried on without
any
trouble or cost. In
reality,
the cost of con-
veyance
is
nearly
always of
importance,
and is
sometimes the
principal
element in the
ques-
tion. To the cost of mere
transport
must be
|i
added a
variety
of
charges
of
brokers,
agents,
packers,
dock, harbour,
light
dues, &c.,
together
with
any
custom duties
imposed
either on the
\<
importation
or
exportation
of commodities. All
these
charges,
whether
necessary
or
arbitrary,
104 The
Theory of
Political
Economy.
are so
many impediments
to
commerce,
and
tend to reduce its
advantages.
The effect of
any
one such
charge,
or of the
aggregate
of the
costs of
exchange,
can be
represented
in our
formulae in a
very simple
manner.
In whatever mode the
charges
are
payable,
they may
be conceived as
paid by
the surren-
der on
importation
of a certain fraction of the
commodity
received
;
for the amount of the
charges
will almost
always
be
proportional
to
the
quantity
of
goods,
and,
if
expressed
in
money,
can be considered as turned into com-
modity.
Thus,
if A
gives
x,
this is not the
quantity
received
by
B
;
a
part
of x is
previously
sub-
tracted,
so that B receives
say
mx,
which is
less than
x,
and the terms of
exchange
must
be
adjusted
on his
part
so as to
agree
with
this condition. Hence the second
equation
will be
s-
y (p
z (mx)
\
mx~^(by)'\
X
v_^_
Again,
A,
though giving
x,
will not receive the
whole of
y
;
but
say ny,
so that his
equation
similarly
is
<p
l
(a-x)_ny
\if I'W^/i nt*
vf'i \
'v
y i
**/
Theory of Exchange.
105
The result
is,
that there is not one
ratio_qf
K
exchange,
but two
ratios;
and the more these
differ,
the less
advantage
there will be in ex-
change.
It is obvious that A has either to re- l
main satisfied with less of the second commo-
dity
than
before,
or has to
give
more of his
own in
purchasing
it.
The
equations
of
impeded exchange may
also
be stated in the concise form
Illustrations
of
the
Theory of Exchange.
As stated
above,
the
Theory
of
Exchange may
seem to be of a somewhat abstract and
per-
plexing
character;
but it is not difficult to find
practical
illustrations which will show how it
is verified in the actual
working
of a
great
market.
The
ordinary
laws of
supply
and de-
mand. when
properly
stated, are the
practical
manifestation of the
theory.
Considerable dis-
cussion has indeed
recently
taken
place
con-
cerning
these
laws,
in
consequence
of Mr. W. T.
Thornton's
writings upon
the
subject
in the
'Fortnightly
Review/
and in his work on the
'
Claims of Labour.' Mr.
Mill,
although
he had
previously
declared the
Theory
of Value to be
106 The
Theory of
Political
Economy.
complete
and
perfect (see p. 80),
has been led
by
Mr. Thornton's
arguments
to allow that
modification is
required.
For
my
own
part,
I
think that most of
Mr,
Thornton's arguments
are beside the
question.
He
suggests
that
are no
regular
la.ws nf
supply
arid de-
;
<
mand. because he adduces
certain
cases in
which no
regular
variation
caii
take
place.
Those cases
might
be
indefinitely multiplied,
and
yet
the laws in
question
would not be
touched. Of
course,
laws which assume a con-
tinuity
of variation are
inapplicable
where con-
tinuous variation is
impossible.
Economists
can never be free from
difnculties_unless_hey
will
distinguish
between a
theory
..and~th_
ap~
plication *f
a
theory.
Because,
in retail
trade,
in
English
or Dutch
auction,
or other
particu-
lar
instances,
we cannot at once observe the
operation
of the laws of
supply
and
demand,
it
is not in the least to be
supposed
that those
laws are false. In
fact,
Mr. Thornton seems to
allow
that,
if
prospective
demand and
supply
are taken into
account they become substan-
tially
true.
But,
in the actual
working
of
any
market,
the influence of future events would
never be
neglected
either
by
a merchant or an
economist.
Theory of Exchange.
107
Though
Mr. Thornton's
objections
are
mostly
beside the
question,
his remarks have served to
show that the action of the laws of
supply
and
demand was
inadequately explained by previous
economists. What
constitutes_the_
demand_and
the
supply
was not
carefully
;
pnmigh
investi-
gated.
As Mr. Thornton
points
out,
there
may
be a number of
persons willing
to
buy
;
but if
their
highest
offer is ever so little short of the
lowest
price
which the seller is
willing
to
take,
their influence is nil. If in an auction there are
ten
people willing
to
buy
a horse at
20,
but
not
higher,
their demand
instantly
ceases
when
any
one
person
offers 21. I am inclined not
only
to
accept
such a
view,
but to
carry
it
much further.
Any change
in the
price
of an
article will bo determined not with
regard
to
the
largeliumbers
who
might
or
might
not
buy
it at other
prices,
but
by
the few who will or
will not
buy
it
according
as a
change
is made
close to the
existing^pFice.
The
theory
consists in
carrying
out this view
to the
point
of
asserting,
that it is
only
com-
paratively
insignificant quantities
of
supply
and demand which are at
any
moment
opera-
tive on the ratio of
exchange.
This is
practi-
cally
verified
by
what takes
place
in
any very
108 The
Theory of
Political
Economy.
large
market
say
that of the Consolidated
Funds. As
the.
whole amount of the funds
is
nearly eight
hundred millions
sterling,
the
quantity bought
or sold
by any ordinary pur-
chaser,
is almost
indefinitely
small in
compari-
son. Even
.1,000
worth of stock
may
be taken
as an
infinitesimally
small
increment,
because
it does not
appreciably
affect the total
existing
supply.
NowJ;he
theory
consists in
asserting,
that the market
price
of the funds is affected
from hour to hour not
by
the enormous
amounts which
might
be
bought
or sold at ex-
treme
prices,
but
by
the
comparatively insig-
nificant amounts which are
being
sold or
bought
at the
existing prices.
A
change
of
price
is
always
occasioned
by
the
overbalancing
of the
inclinations of those who will or will not sell
just
about the
point
at which
prices
stand.
When
Consols are
93^,
and business is in a
tranquil
state,
it matters not how
many
buyers
there are at
93,
or"sellers at
9,4.
They
are
really
off the market. TEose
only
are
operative
who
may
be made to
buy
or sell
by
a rise or
fall of an
eighth
or a sixteenth. The
question
is,
whethej thejrice
shall remain
aTjTS^.
or
rise^to
93VV>
or fall to
93-iV./
This is deter-
mined
l5y
the sale
6r~purchase
of
comparatively
Theory of Exchange.
109
very
small amounts. It is the
purchasers
who
find a little stock more useful to them than the
corresponding
sum of
money,
who make the
price
rise
by
-rV-
When the
price
of the funds
is
very steady
and the market
quiescent,
it
means that the stocks are distributed
among
holders in such a
way
that the
exchange
of
more or less at the
prevailing price
is a matter
of
indifference.
In
practice,
no market ever
long
fulfils the
theoretical conditions of
equilibrium,
because,
from the various accidents of life and
business,
there are sure to be
many people every day
compelled
to sell or
having^
sudden
strong
in-
ducements to
buy.
There is
nearly always,
again,
the influence of
prospective supply
or
deniandr~depending upon~~fhe~ "political
intelli-
gencejoOhe^
moment. But we shall never have
a Science of Political
Economy
unless we learn
to discern the
operation
of law even
among
the
most
perplexing
accidents and
interruptions.
Various Problems in the
Theory of
Exchange.
We have considered hitherto
only
one
simple
case of the
Theory
of
Exchange.
In all other
cases where the commodities are
capable
of
110
The
Theory of
Political
Economy.
indefinite
subdivision,
the
principles
will be
exactly
the
same,
but the
particular
conditions
may
be
subject
to much variation.
We
may, firstly, express
the conditions of a
very great
market where vast
quantities
of
some stock are
available,
so that
any
one small
trader will not
appreciably
affect the ratio of
exchange.
This ratio
is, then,
approximately
a
fixed
number,
and each trader
exchanges
at
that ratio
just
so much as suits him. These
circumstances
may
be
represented by supposing
A to be a
trading body possessing
two
very
large
stocks of
commodities,
a and b. Let C be
a
person
who
possesses
a
comparatively
small
quantity
c of the second
commodity,
and
gives
a
portion
of
it,
y,
which is small
compared
with
6,
in
exchange
for a
portion
x of
a,
which
is small
compared
with a.
Then,
after ex-
change,
we shall find A in
possession
of the
quantities
a x and b
+
y,
and C in
possession
of x and c
y.
The
equations
will become
+y)
x
z
(c-y
Since a x and b +
y
do not
appreciably
differ
from a and
6,
we
may
substitute the latter
quantities,
and we
have,
for the first
equation,
approximately,
Theory of
Exchange.
Ill
a
y
T
=
^
6 a?
The ratio of
exchange being
a fixed ratio de-
termined
by
the conditions of the
trading body
A,
there
is,
in
reality, only
one undetermined
quantity,
x,
the
quantity
of
commodity
which
C finds it
advantageous
to
purchase by expend-
ing part
of c. This will now be determined
by
the
equation
\Jx-j
b
\^
2
(c mx)
^
This
equation jyjlL represent
the
condition_in
regardto any
one distinct
commoditv_of
a
very
small
country trading
with a
much^araer__Qiie.
IlnnighT^epresent,
to some
extent,
the circum-
stances of trade between the Channel
Islands
and the
larger
markets of
England, though,
of
course,
it is never
fully
verified,
because
the
smallest
purchasers
do affect the market
in
some
degree.
The
equation
more
accurately
represents
the
position
of a
single
trader
with
regard
to the
aggregate
trade of a
large
community,
since he must
buy
and sell at the
current
prices,
which he cannot in an
appreci-
able
degree
affect.
A still
simpler
formula, however,
is needed
to
represent
the conditions of a
large part
of
112 The
Theory of
Political
Economy.
our
purchases.
In
many
cases we want so
little of a
commodity,
that an individual need
not
give
more than a
very
small fraction of
his
possessions
to obtain it. We
may suppose,
then,
that
y
in the last
problem
was a
very
small
part
of
c,
so that
^
z (c
y)
does not dif-
fer
appreciably
from
\|^
2
c.
Taking
m as before
to be the
existing
ratio of
exchange,
we have
the one
equation
d>
z
x
-
=m,
or
(f)
2
x m.
\p-2
c.
This means that
Jg_will buy
pf-the
commodity
until
its
degree
of
jitility-Jalls
below_thaLjo-the
^commodity
he
gives.
A
person's expenditure
on salt is an inconsiderable item of
expense
;
what he
spends
thus does not make him
appre-
ciably poorer
;
yet,
if the established
price
or
ratio is one
penny
for each
pound
of
salt,
he
buys
in
any
time,
say
one
year,
so
many pounds
that an additional
pound
would not have so
much
utility
to him as a
penny.
In the above
equation
m.
^
2
c
represents
the
utility
to him of
a
penny,
an inconsiderable fraction of his
pos-
sessions,
and he
buys
salt until
fax,
which is
approximately
the
utility
of the next
pound,
is
equal
to,
or it
may
be somewhat
less,
than that
Theory of Exchange.
113
of the
penny.
But this case must not be con-
fused with that of
purchases
which
appreciably
affect the
possessions
of the
purchaser.
Thus,
if a
poor family purchase
much
butchers'-meat,
they
will
probably
have to
go
without some-
thing
else. The more
they buy,
the lower the
final
degree
of
utility
of the
meat,
and
the_
higher
the
final degree of utility of something
else;
and thus these
purchases
will be the
more
narrowly
limited.
Complex
Cases
of
the
Theory.
We have hitherto considered the
Theory
of
Exchange
as
applying only
to two
trading
bodies
possessing
and
dealing
in two commo-
dities.
Exactly
the same
principles
hold
true,
however numerous and
complicated
the con-
ditions. The main
point
to be remembered in
tracing
out the resultsoF^the theory is,
that
the same commodities in the same market can
have
only
one ratio of
exchange,
which must
thejefore prevail
between each
body
andeach
other,
the costs of
conveyance being
consi-
dered as nil. The
equations
become
rapidly
more numerous as additional bodies or commo-
dities are considered
;
but we
may
exhibit them
in the case of three
trading
bodies and three
commodities.
i
114 The
Theory of
Political
Economy.
Thus,
suppose
that
A
possesses
the stock a of
cotton,
and
gives
x^
of it to
B,
c
a
to C.
B
possesses
the stock 6 of
silk,
and
gives
y
to
A,
2/2
to C.
C
possesses
the stock c of
wool,
and
gives
z
v
to
A,
z
a
to B.
We have here
altogether
six unknown
quan-
tities
^
x
z
,
2/i 2/2
if &j ;
hut we have also suf-
ficient means of
determining
them.
They
are
exchanged
as follows
A
gives
#!
for
y
lt
and a?
a
for z.
B
2/1
for
Cj,
and
y^
for z
2
.
C
!
for C
2
an(i Z
2
f r
2/2-
These
may
be treated as
independent exchanges
;
each
body
must be satisfied in
regard
to each
of its
exchanges,
and we must therefore take
into account the functions of
utility
or the
final
degrees
of
utility
of each
commodity
in
respect
of each
body.
Let us
express
these
functions as follows
<t>
lt -^j,
xi
are the
respective
functions of
utility
for
.....
A.
#2>
^2 X2
.......
B.
Now
A,
after the
exchange,
will hold a
x^
x
z
of cotton and
y
1
of silk
;
and B will hold
x^
of
Theory of Exchange.
115
cotton and
2/12/2
of silk: their ratio of
exchange,
y
1
for
a^,
will therefore be
governed
by
the
following pair
of
equations
The
exchange
of A with C will be
similarly
de-
termined
by
the ratio of the
degrees
of
utility
of
cotton and wool on each side
subsequent
to
the
exchange;
hence we have
(a -Xi-xz
)
_
z
l
_ (p
s
x
z
There will also be
interchange
between B and
C which will be
independently regulated
on
similar
principles,
so that we have another
pair
of
equations
to
complete
the
conditions,
namely,
^2 (6
~2/i -2/2)
_
^2
_
^2
2/2
Xa% 2/2 X3(c~2i-2
a
)'
We
might proceed
in the same
way
to
lay
down the conditions of
exchange
between more
j
numerous
bodies,
but the
principles
would be
exactly
the same. For
every quantity
of com-
modity
which is
given something
must be re-
ceived
;
and if it be received from several
par-
ties,
then we
may
conceive the
quantity
which
is
given
for it to be broken
up
into as
many
distinct
portions.
The
exchanges
in the most
complicated
case
may
thus
always
be decom-
i 2
116 The
Theory of
Political
Economy.
posed
into
simple exchanges,
and
every
ex-
change
will
give
rise to two
equations
sufficient
to
determine the
quantities
involved. The same
can also be done when there are two or more
commodities in the
possession
of each
trading
body.
One case of the
Theory
of
Exchange
is of
parties compete
in
supplying
a
third__with^a
certain
commodity.
Thus,
suppose
that
A,
with
the
quantity
of one
commodity
denoted
by
a,
purchases
another kind of
commodity
both from
B and
C,
which
respectively possess
b and c of
it. All the
quantities
concerned &re as
fol-
lows
A
gives
x
l
of a to B and a?
2
to
C,
B
y
l
of b to
A,
C
y
2
of c to A.
As each
commodity may
be
supposed
to be
perfectly homogeneous,
the ratio of
exchange
must be the same in one case as in the
other,
so that we have one
equation
thus furnished
Now,
provided
that A
gets
the
right
commo-
dity
in the
proper quantity,
he does not care
whence it
comes,
so that we need
not,
in his
Theory of Exchange.
117
equation,
distinguish
the source or destination
of
the
quantities;
he
simply gives
x
l
+
a;
2 ,
and
receives in
exchange
2/1
+
2/2-
Observing,
then,
that
by (1)
_
vCi\
~r
3?2 *^i
we have the usual
equation
of
exchange
^1(2/1+2/2)
*l"
But B and C must both be
separately
satisfied
with their
portions
of the
transaction. Thus
^2^1 2/1. /Q\
i
*
=
- -
1
I O I
dr
(b 1/)
X
v
(fo .2*0
tya '
o a
^/
SS
(*)
There are
altogether
four unknown
quantities
#! ^2>
2/i 2/aJ
and it is
apparent
that we have
four
equations by
which to determine them.
Various
suppositions might
be made as to the
comparative magnitude
of the
quantities
b and
c,
or the character of the functions concerned
;
and conclusions could then be drawn as to the
effect
upon
the trade. The
general
result would
be,
that the smaller holder must more or less
comform to the
prices
of the
larger
holder.
118 The
Theory of
Political
Economy.
Failure
of
the
Equations of Exchange.
Cases
may readily
occur in which
equations
of the kind set forth in the
preceding pages
fail to hold
true,
or lead to
impossible
results.
Such failure
may
indicate that no
exchange
at
all takes
place,
but it
may
also have a different
meaning.
In the first
place,
it
may happen
that the
commodit^possesseT by
A has a
high degree
of
utility
to
A,
and a low
degree
to
B,_and
that
vice versa B's
commodity
has a
high degree
of
utility
to B and less to A. This difference of
utility might
exist to such an
extent,
that
though
B were to receive
very
little of A's com-
modity, yet
the final
degree
of
utility
to him
would be less than that of his own
commodity,
of which he
enjoys
much more. In such a case
no benefit can arise from
exchange,
and no
exchange
will
consequently
take
place.
This
failure of
exchange
will be indicated
by
a failure
of the
equations.
But it
may also_happen
that the whole
quan-
tities of
commodity possessed
are
exchanged,
and
yet
the
equations
fail. A
may
have so low
a desire for
consuming
his own
commodity,
that
the
very
last minute
portion
of it has less
degree
TJieory of Exchange.
119
of
utility
to him than a small addition to
the
commodity
received in
exchange.
The same
state of
things might happen
to exist with B as
regards
his
commodity
: under these circum-
stances the whole
possessions
of one
might
be
exchanged
for the whole of the
other,
and the
ratio of
exchange
would of course he denned
by
these
quantities.
Yet each
party might
desire the last increment of the
commodity
received more than the last increment of that
\<> given,
so that the
equations
would fail to
.be
j-Jr
true. This case will
hardly
occur
practically
~m international
trade,
since two nations
usually
trade in
many
commodities,
which would alter
the conditions.
Again,
the
equations^j)f
exchange
willjjiil
tor
_
*
~~
~
I
be
possible
when^the
commodity
or useful article
possessed
on one or both sides is indivisible.
We have
always
assumed hitherto that more
or less of a
commodity may
be
had,
even down
to
infinitely
small
quantities.
This is
approxi-
mately
true of all
ordinary
trade,
especially
international trade between
great
industrial
nations.
Any
one sack of corn or
any
one bar
of iron is
practically
infinitesimal
compared
with the
quantities exchanged by
America and
England
;
and even one
cargo
or
parcel
of
120 The
Theory of
Political
Economy.
corn or iron is an inconsiderable fraction of the
whole.
But,
in
exceptional
cases,
even inter-
national trade
might
involve indivisible
articles.
We
might
conceive the British Government
giving
the Koh-i-noor diamond to the Khedive
of
Egypt
in
exchange
for
Pompey's
Pillar,
in
which case it would
certainly
not answer the
purpose
to break
up
one article or the other.
When an island or
portion
of
territory
is trans-
ferred from one
possessor
to
another,
it is
often
necessary
to take the
whole,
or none.
America,
in
purchasing
Alaska from
Russia,
would
hardly
have consented to
purchase
less
than the
whole. In
every
sale of a
house,
fac-
tory,
or other
building,
it is
usually impractic-
able to make
any
division without
greatly
lessening
the
utility
of the whole. In all such
cases our
equations
must fail to
exist,
because
we cannot
contemplate
the existence of an
increment or a decrement to an indivisible
article.
Suppose,
for
example,
that A and B each
pos-
sess a
book:
they
cannot break
up
the
books,
and must therefore
exchange
them
entire,
if at
all. Under what conditions will
they
do
so?
j
i
Plainly
on the
condition
that each makes a
gain
of
utility by
so
doing.
Here we deal not with
Theory of Exchange.
121
the final
degree
of
utility depending
on an in-
finitesimal
quantity,
but on the whole
utility of
the
complete
article. Now let
u
r
be the
utility
of A's book to
A,
u
2
A's to
B,
v
1
B's to
A,
v
a
B's to B.
Then the conditions of
exchange
are
simply
We
might
indeed
contemplate
the case where
the utilities were
exactly equal
on one side
;
thus V>M
B would then be
wholly
indifferent to
any
ex-
-
change,
and I do not see
any
means of
deciding
whether he would or would not consent to it..
__
But we need
hardly
consider the
case,
as it
could seldom
practically
occur.
Weje_tlie_juti-l/
lities
exactly equal-
-OIL. both
sides,
ihere would 1
obviously
be no motive to
exchange. Again,
the
slightest
loss of
utility
on either side would
be a
complete
bar to the
transaction,
because
we are not
supposing,
at
present,
that
any
other
commodities are in
possession
so as to allow of
separate
inducements,
or that
any
other motives
than such as arise out of commercial
gain
and
122
The
Theory of
Political
Economy.
simple
desire of one's own convenience enter
into the
question.
A much more difficult
jpr^bLem.
suppose
_an
indivisible article
exchanged
divisible
commodity.
When Russia sold Alaska
this was a
practically
indivisible
thing,
but it
was
bought
with
money
of which more or less
might
be
given
to
indefinitely
small
quantities.
A
bargain
of this kind is
exceedingly
common
;
indeed it occurs in the case of
every
house,
mansion, estate,
factory, ship,
or
other^complete
I |[
w^ole^which
is sold
formpjipy.
Our
Jsrmer
equations
of
exchange certainly
fail,
for
they
involve increments of
commodity
on both sides.
The
theory
seems to
give
a
very unsatisfactory
answer,
for the
problem proves
to
be,
within
certain
limits,
indeterminate.
Let X be the indivisible article
;
u
:
its
utility
to its
possessor
A,
and u
2
its
utility
to B. Let
y
be the
quantity
of
commodity given
for
it,
which
may
be in
any degree
more or less
;
let
#!
be the whole
utility
of
y
to
A,
and v
2
to B.
Then it is
quite
evident
that,
to
give
rise to
exchange,
v
1
must be
greater
than u
1}
and u
z
must be
greater
than v
a ;
that
is,
there must be
a
gain
of
utility
on each side. The
quantity y
must not be so
great
as to
deprive
B of
gain,
Theory of Exchange.
128
nor so small as to
deprive
A of
gain.
The fol-
lowing
is an extract from Mr. Thornton's work
which
exactly expresses
the
problem
:
*
There are two
opposite
extremes one above
which the
price
of a
commodity
cannot
rise,
the other below which it cannot fall. The
upper
of these limits is marked
by
the
utility,
real or
supposed,
of the
commodity
to the cus-
tomer;
the
lower,
of its
utility
to the dealer.
No one will
give
for a
commodity
a
quantity
of
money
or
money's
worth, which,
in his
opinion,
would be of more use to him than the commo-
dity
itself. No one will take for a
commodity
a
quantity
of
money
or of
anything
else which
he thinks would be of less use to himself than
the
commodity.
The
price eventually given
and
taken
may
be either at one of the
opposite
ex-
tremes,
or
may
be
anywhere
intermediate be-
tween them
e
/
Three distinct cases
might
occur which can
best be illustrated
by
a concrete
example. Sup-
pose
we can read the
thoughts
of the
parties
in the sale of a house. If A
says
1200 is the
least
price
which will
give any gain,
and B
holds that 800 is the
highest price
which will
e
Thornton
'
On Labour
;
its
Wrongful
Claims and
Rightful
Dues
'
(1869), p.
58.
124
The
Theory of
Political
Economy.
be
profitable
to
him,
no
exchange
can
possibly
take
place.
If A should find
1000 to be his
lowest
limit,
while B
happens
to name the same
sum for his
highest
limit,
the transaction can
be
closed,
and the
price
will be
exactly
defined.
But
supposing, finally,
that A is
really willing
to
sell at
900,
and B is
prepared
to
buy
at
1100,
in what manner can we
theoretically
determine
the
price?
I see no mode of
solving
the
ques-
tion.
Any price
between 900 and 1100 will
leave a
profit
on each
side,
and both
parties
will
lose if
they
do not come to terms. I conceive
that such a transaction must be settled
upon
other than economical
grounds.
The_dispositipn
parative persistency,
their adroitness and
expe-
rience in
business,
or it
may
be_a feeling
of
justice_or__of
kindliness
reaUy_Jnfluences-
the
decision.
_
These are motives
altogether
extra-
neous to a
theory
of
Economy,
and
-yet they
appear necessary
considerations in this
problem.
It
may
be,
that indeterminate
bargains
of this
kind are best
arranged by
an arbitrator or third
party.
The
equations
of
exchange may
fail
again
where commodities are
divisible,
but not to in-
definitely
small
quantities.
There is
always,
in
Theory of Exchange.
125
retail
trade,
a
convenient unit below which we
do not descend in
purchases. Paper may
be
bought
in
quires,
or even in
packets,
which it
may
not be desirable to break
up.
Wine can-
not be
bought
from the wine merchant in less
than a
bottle at a time. In all such cases
exchange
cannot,
theoretically speaking,
be
perfectly adjusted,
because it will be
infinitely
improbable
that an exact number of units will
give
exact
equations
of
utility.
In a
large pro-
portion
of
cases, indeed,
the unit
may
be so
small
compared
with the whole
quantities
ex-
changed,
as
practically
to be
indefinitely
small.
But
suppose
that a
person
be
buying
ink which
is
only
to be
had,
under the
circumstances,
in
one
shilling
bottles. If one bottle be not
quite
enough,
how will he decide whether to take a
second or not.
Clearly by estimating
the
aggre-
gate utility
of the bottle of ink
compared
with
the
shilling.
If there be an
excess,
he will cer-
tainly purchase
it,
and
proceed
to consider
whether a third be desirable or not.
This case
might
be illustrated
by Figure
VI,
in which the
spaces oq
l}
p^^ p
2
q
s
,
&c.
repre-
sent the whole
utility
of successive bottles of
ink;
while the
spaces
or
lt
p^,
&c.
equal
in size
to each
other,
represent
the
utility
of
successive
126
The
Theory of
Political
Economy.
shillings.
There is no doubt that three hottles
will be
purchased,
but the fourth will not be
purchased
unless the
space
p
s
q
&
q p
exceed in
area
p
s
r
s
r
4
p
4
.
Cases of this kind are similar to those treated
in
p.
119,
where the
things exchanged
are indi-
visible,
except
that the
question
of
exchange
or no
exchange
occurs over and over
again
with
respect
to each successive
unit,
and is
decided in
respect
to each
by
the excess of the
total
utility
of the unit received over the total
utility
of that
given.
There is indeed
perfect
harmony
between the cases where
equations
can and where
they
cannot
be
established;
for
we have
only
to
imagine
the indivisible units
of
commodity
to be
indefinitely
lessened in size
to enable us to
pass gradually
down to the case
Theory of
Exchange.
127
where
equality
of the increments of
utility
is
ultimately
established.
Equivalence of
Commodities.
Much confusion is thrown into the statistical
investigation
of
questions
of
supply
and demand
by
the circumstance^ that one
commodity
can
often
replace another,
and serve the
sjmjgL
pur-
ppsemore_jiEJess--perfectly.
The
same,
or
nearly
the same substance is often obtained from two
or three sources. The constituents of
wheat,
barley,
oats,
and
rye
are
closely
similar,
if not
identical.
Vegetable
structures are
composed
mainly
of the same chemical
compound
in
nearly
all
cases. Animal
meat,
again,
is of
nearly
the same
composition
from whatever
animal derived.
There_
are endless differences
of flavour and
quality,
but these are often in-
sufficient to
prevent
one kind from
serving
in
place
of another.
Whenever
fHffinwvj^pmm"ditiea.
n.m thnf^
ap-
---
plicable
to the same
purposes, their_conditions
of demand and
exchange_are__not
hidftpftndfint.
Their mutual ratio
of^
exchange__cannQt~Eary
much,
for it will
be^cjoseiyi-d^fiaedr-by^fee
ratio
of their utilities. Beef and
mutton,
for in-
stance,
differ so
little,
that
many people
eat
128
The
Theory of
Political
Economy.
them almost
indifferently.
The
price
of mut-
ton,
on an
average,
exceeds that of beef
in
the
ratio^
of 9 to 8
;
we must conclude that
people
generally
esteem mutton more than
beef in this
proportion,
otherwise
they
would
not
buy
the dearer meat. It
follows,
that the
final
degrees
of
utility
of these meats
are in
this
ratio,
or that if
<f)X
be the
degree
of
utility
of
mutton,
and
^y
that of beef, we have
mf\
--
'--II
'
i^AMMMiMfl->MMM^^B*"
>*^
This
equation
would doubtless not hold true
in
^xtreme
circumstances
;
if mutton became
comparatively
scarce,
there would
probably
be
some
persons willing
to
pay
a
higher price
merely
because it would then be considered a
delicacy:
But this is
certain,
that so
long
as
the
equation
holds
true,
the ratio of
exchange
between mutton and beef will not
diverge
from
that of 8 to 9.
If the
supply
of beef falls
off to a small
extent,
people
will not
pay
a
higher price
for
it,
but will eat more mutton
;
and if the
supply
of mutton falls
off,
they
will
eat more beef. The conditions of
supply
will
have no effect whatever
upon
the ratio of ex-
change
;
we
must,
in
fact,
treat beef and mutton
as one
commodity
of two different
strengths,
just
as
gold
at
eighteen
and
twenty
carats is
Theory of Exchange.
129
hardly
considered as two but as one commo-
dity,
of which
twenty parts
of one are
equiva-
lent to
eighteen
of the other.
It is
upon
this
principle
that we must ex-
plain,
in
harmony
with Professor Cairnes'
views,
the
extraordinary permanence
of the ratio of
exchange
of
gold
and
silver,
which for several
centuries
past
has never
diverged
much from
15 to 1. That this fixedness of ratio does
not
depend upon
the amount or cost of
pro-
duction is
proved by
the
very slight
effect
of the
Australian and
Californian
gold
disco-
veries,
which never raised the
gold price
of
silver more than about 4
per
cent.,
and has
failed to have a
permanent
effect of more than
14-
per
cent. It must be due to the
fact,
that
gold
and silver can be
employed
for
exactly
the same
purposes,
but that the
superior
bril-
liancy
of
gold
occasions it to be
preferred,
un-
less it be about 15 or
15^
times as
costly
as
silver.
Probably,
however,
the fixed ratio of
15i
to
1,
according
to which these metals are
exchanged
in the
currency
of France and some
other continental
countries,
has
helped
to ren-
der
steady
the market ratio of
exchange
of
the metals. The French
Currency
Law of the
Year XI establishes an artificial
equation
K
130
The
Theory of
Political
Economy.
Utility
of
gold
=
151
x
Utility
of silver
;
and it is
probably
not without some reason that
M. Wolowski and other recent French econo-
mists attributed to this law of
replacement
an
important
effect in
preventing
disturbance in
the relations of
gold
and silver.
Acquired Utility of
Commodities.
The
Theory
of
Exchange,
as
explained
above,
rests
entirely
on the~c^nsicferation of
quantities
of
^utility,
and no~reference to labour or cost of
production
has been made. The value of a
commodity,
if I
may
for a moment use the dan-
gerous
term,
is
measured,
not
by
its total util-
ity,
but
by
the
intensity
of the need we have
for
more of it. But the
power
of
exchanging
one
commodity
for another
greatly
extends the
range'
of~this
Utility.
We are no
longer
limited
to~considering
the
degree
of
utility
of a commo-
dity
as
regards
the wants of its immediate
pos-
sessor;
for it
may
have a
higher
usefulness to
some other
person,
and can be transferred to
that
person
in
exchange
for some
commodity
,
of
superior utility
to.
the
purchaser.
The
gene-
ral result of
exchange
is,
that all commodities
sink,
as it
were,
to the same level of
utility
in
respect
of the last
portions
consumed.
Theory of Exchange.
131
Inthe
Theory
of
Exchange
we find that the
possessor
of
any
divisible
commodity
will ex-
change
such a
portion
of
it,
that the next in-
crement would have
exactly equal utility
with
the increment of other
produce
which he would
receive for
it. This will hold
good
however
various
may
be the kinds of
commodity
he re-
quires.
Suppose
that a
person possesses
one
single commodity,
which we
may
consider to be
money,
or
income,
and that
p, q,
r, s, t,
&c.
are
quantities
of other commodities which he
purchases
with
portions
of his income. Let x
be the uncertain
quantity
of
money
which he
will desire not to
exchange
;
what relation will
exist between these
quantities
x,
p, q,
r,
&c. ?
This relation will
partly depend upon
the ratio
of
exchange, partly
on the final
degree
of util-
ity
of these commodities. Let us
assume,
for
a
moment,
that all the ratios of
exchange
are
equalities,
or that a unit of one is
always
to
be
purchased
with a unit of another.
Then,
plainly,
we must have the
degrees
of
utility
equal,
otherwise there would be
advantage
in
acquiring
more of that
possessing
the
higher
degree
of
utility.
Let the
sign
< denote the
function of
utility,
which will be different in
each case
;
then we have
simply
the
equations
K 2
132
The
Theory of
Political
Economy.
-^
<pl
X
=
u>
2 P
==
03
Q
==
04
V
==
05
S
=
&C.
But,
as a matter of
fact,
the ratios of
exchange
are seldom or never that of unit for unit
;
and
when the
quantities exchanged
are
unequal,
the
degrees
of
utility
will not be
equal.
If for one
pound
of silk I can have three of
cotton,
then
the
degree
of
utility
of cotton must be a third
that of
silk,
otherwise I should
gain by
ex-
')
''
change.
Thus the
general
result of the
facility
f
of
exchange prevailing
in a civilized
country
is,
that a
person procures
such
quantities
of
commo-
dities tliatlhe
final degrees
of utility
are
inversely
as~the ratios
of exchange of
the commodities.
Let x
lt
x
2 ,
x
s
,
x
4 ,
&c. be the
portions
of his
income
given
for
p, q,
r, s,
&c.
respectively,
then we must have
<j
x
p (p!
x
q (fr^x
r
and so on. The
theory
thus
represents
the
fact,
that a
person
distributes his
expenditure
in such
a
way
as to
equalise
the
utility
of the final in-
crements in each branch of
expenditure.
This
distribution will
greatly vary
with different in-
dividuals,
but it is self-evident that the want
which an individual feels most
acutely
at the
moment will be that
upon
which he will ex-
pend
some of his income if
possible.
Theory of Exchange.
133
It will be seen that we can now
conceive,
in
an accurate
manner,
the
utility
of
money,
or of
the
supply
of
commodity
which forms a
per-
son's livelihood. Its final
degree
of
utility
is
measured
by
that of
any
of the other commo-
dities which he consumes.
What,
for
instance,
is the
utility
of one
penny
to a
poor family
earning fifty pounds
a
year
? As a
penny
is an
inconsiderable
portion
of their
income,
it
may
represent
one of the
indefinitely
small incre-
ments,
and its
utility
is
equal
to the
utility
of
the
quantity
of
bread, tea,
sugar,
or other arti-
cles which
they
could
purchase
with
it,
this
utility depending upon
the extent to which
they
were
already provided
with those articles. To
a
family possessing
one thousand
pounds
a
year,
the
utility
of a
penny may
be measured in an
exactly
similar
manner;
but it will be found
to be much
less,
because their want of
any
given commodity
will be satiated or satisfied
to a much
greater
extent,
so that the
urgency
of need for a
pennyworth
more of
any
article
is much reduced.
The
general
result
ofexchange
is thus to
produce
a certain
equality
of
utility
between
different
commodities,
as
regards
the same in-
dividual
;
but between different individuals no
134
The
Theory of
Political
Economy.
II
such
equality
will exist. In Political
Economy
we
regard only
commercial
transactions,
and no
equalisation
of wealth from charitable motives
is considered. The
utility
of wealth to a
very
rich man will be
governed by
its
utility
in
branch of
expenditure
in which he continues
to feel the most need of more
possessions.
His
primary
wants will
long
since have been
fully
satisfied
;
he could find
food,
if
requisite,
for a
thousand
persons,
and
so,
of
course,
he will have
supplied
himself with as much as he in the least
desires. But so far as is consistent with the
inequality
of wealth in
every community,
all
commodities are distributed in
exchange
so as
to
produce
the maximum of
benefit.
Every per-
son whose wish for a certain
thing
exceeds his
wish for other
things, acquires
what he
wants,
provided
he can make a sufficient sacrifice in
other
respects.
No one is ever
required
to
give
what he more desires for what he less
desires,
so that
perfect
freedom of
exchaBge_Jimsi-Jbe
to
the_a3vantage_
of aHC
The
Advantage of Exchange.
It is a most
important
deduction from this
theory
that the ratio of
exchange gives
no indi-
cation of the real benefit derived from the act
Theory of Exchange.
135
of
exchange.
So
many
trades are
occupied
in
buying
and
selling,
and
depend
for their
profit
upon buying
low and
selling high,
that there
arises a fallacious
tendency
to believe that the
whole benefit of trade is in low
prices.
It is
implied
that to
pay
a
high price
is
worse
than
doing
without the
article,
and the whole finan-
cial
system
of a
great
nation
may
be distorted
in the effort to
carry
out a false
theory.
This is the result to which some of
Mr. Mill's
remarks,
in his
'
Theory
of
International
Trade/
would lead. That
theory
is
always ingenious,
and
nearly always,
as it seems to
me,
true
;
but
he draws from it the
following
conclusion
f
:
*The countries which
carry
on their
foreign
trade on the most
advantageous
terms,
are
those whose commodities are most in demand
by foreign
countries,
and which have them-
selves the least demand for
foreign
commodi-
ties.
From
which,
among
other
consequences,
it
follows,
that the richest
countries,
cceteris
iifl.
givp.n
ammmt nf
foreign
commerce :
since,
having
a
greater
de-
mand
for commodities
generally, they
are
likely
to have
a
greater
demand for
foreign
commodi-
ties,
and thus
modify
the terms of
interchange
f
'
Principles
of Political
Economy,'
book iii.
chap.
18,
8.
136 The
Theory of
Political
Economy.
to their own
disadvantage.
Their
aggregate
gains by foreign
trade, doubtless,
are
generally
greater
than those of
poorer
countries,
since
they carry
on a
greater
amount of such
trade,
and
gain
the benefit of
cheapness
on a
larger
consumption
;
but their
gain
is less on each
individual article consumed.'
In the absence of
any explanation,
this
pas-
sage
must be taken to
mean,
that the advan-
(
3b~
tage
of
foreign
trade
depends upon
the terms
of
exchange,
and that international trade is less
advantageous
to a rich than to a
poor country.
But such a conclusion involves a confusion be-
tween two distinct
things
the
price
of a com-
modity
and its total
utility.
A
country
is not
merely
like a
great
mercantile firm
buying
and
selling goods
and
making
a
profit
out of the
difference of
price
;
it
buys goods
in order to
consume them.
But,
in
estimating
the benefit
a consumer derives from a
commodity,
it is the
total
utility
which must be taken as the mea-
sure,
not the final
degree
of
utility
on which
the terms of
exchange depend.
To illustrate this we
may employ
the curves
in
Figure
VII to
represent
the functions of
utility
of two commodities. Let the wool of
Australia be
represented by
the line
ob,
and its
Theory of Exchange.
137
total
utility
to Australia
by
the area of the
curvilinear
figure obrp.
Let the
utility
of a
second
commodity, say
cotton
goods,
to Aus-
tralia be
similarly represented
in the lower
curve,
so that the
quantity
of
commodity
mea-
sured
by
o'~b'
gives
a total
utility represented
by
the
figure
o'p'q'b'.
Then,
if Australia
gives
half its
wool, ab,
for the
quantity
of cotton
goods represented by
oV,
it loses the
utility
aqrb,
but
gains
that
represented by
the
larger
area
o'p'q'af.
There is
accordingly
a considerable
138 The
Theory of
Political
Economy.
net
gain
of
utility
which is the real
object
of
exchange.
Even had Australia sold its wool
at a lower
price, obtaining
cotton
goods only
to
the amount of
o'c,
the
.utility
of this
amount,
op'sc,
would have exceeded that of the wool
given
for it. A
prohibitory
tariff in the case
of Australia would have a most fatal effect in
preventing
the
country
from
enjoying
the
high
utility
of
goods
manufactured in
Europe
with
centuries of
experience.
So far is ]Vtr.
jymFs
statement from
being
fun-
damentally
correct,
that^J/
should be inclined
to make the
opposite
statement,
namely,
that
the
greatness
of
jthe__price_which
a^
country
is
willing
to
pay
for the
productions
of other
countries marks the
greatness
of the benefit
which it derives from the trade. He who
pays
a
high price
must either have a
very great
need
of that which he
buys,
or
very
little of that
which he
pays
for it
; and,
on either
supposi-
tion,
there is
gain by exchange.
In
questions
of this sort there
is,
I
believe,
but one rule
which can be
safely
laid
down,
that
no,
one will
buy
a
thing
unless he feels
advantage
from the
purchase
;
and
perfect
freedom of
exchange,
therefore,
tends to the
maximising
of
utility.
One
advantage
of the
Theory
of Political Eco-
Theory of Exchange.
139
nomy, carefully
studied,
will be to make us
very
careful in
many
of our conclusions. The fact
that we can most
imperfectly
estimate the total
utility
of
any
one
commodity
should
prevent
our
attempting
to measure the benefit of
any
trade.
Accordingly,
when /'Sir'
Mijl
proceeds
from his
theory
of international^trade to that
of
taxation,
and arrives at the conclusion that
one nation
may, by
means of taxes on commo-
dities
imported, 'appropriate
to
itself,
at the/"
expense
of
foreigners,
a
larger
share than would
otherwise
belong
to it of the increase in the
general productiveness
of the labour and
capital
of the
worlds,'
I venture
entirely
to
question
the truth of his
results/^Tj
conceive
thatjhis
flrniTiriftfifa__JTVvn]_yft
a. f!mifnrinn
between
-
the
ratio of
excbange__a,nd
tb^ *.nfql
utility
--
commodity,
and a far more accurate
knowledge
of economical laws than
any
one
yet possesses
would be
required
to estimate the true effect of
any
tax. While customs duties
may
in some cases
be defensible as a means of
raising
revenue,
the
time is
past
when
any
economist should
give
the
slightest
countenance to their
employment
for
manipulating
trade,
or
interfering
with the natu-
ral
tendency
of
exchange
to increase
utility.
8
'
Principles
of Political
Economy,'
book v.
chap.
4,
6.
140 The
Theory of
Political
Economy.
Mode
of ascertaining
the Variation
of
Utility.
The future
progress
of Political
Economy
as
a strict science must
greatly depend upon
our
acquiring
more accurate notions of the variable
quantities
concerned in the
problem.
We can-
not
really
tell the effect of
any change
in trade
or manufacture until we can with some
ap-
proach
to truth
express
the laws of the varia-
tion of
utility numerically.
To do this we need
accurate statistics of the
quantities
of commo-
dities
purchased by
the whole
population
at
various
prices.
ThejricL_jof-4^cxmiinMity
is
the
only
test
we_hav-a_flf
the
utility
of
the_gom-
modity
to the
purchaser;
and if we could tell
exactly
how much
people
reduce their
consump-
tion of
each
important
article when the.
price
rises,
we could
determine,
at least
approximately,
the variation of the final
degree
of
utility
the
all-important
element in
Economy.
In such calculations we
may
often make use
of the
simpler equation given
on
p
112. For the
first
approximation
we
may
assume that the
general utility
of a
person's
income is not af-
fected
by
the
changes
of
price
of the commo-
dity
;
so that
if,
in the
equation
Theory of Exchange.
141
<p
# =
m.
-v^
c
we have
many
different
corresponding
values
for x and
w,
we
may
treat
^c,
the
utility
of
money,
as a
constant,
and determine the
general
character of the function
<#,
the final
degree
of
utility.
This function would doubtless be a
purely empirical
one a mere
aggregate
of terms
devised so that their sum shall
vary
in accord-
ance with statistical facts. The
subject
is too
complex
to allow of our
expecting any simple
compact
law like that of
gravity.
Nor,
when
we have
got
the
laws,
shall we be able to
give
any
exact
explanation
of them.
They
will be
of the same character as the
empirical
formulae
used in the science of
Meteorology
h
,
mere
aggre-
gates
of mathematical
symbols
intended to re-
place
a tabular
statement,
except
that
they
will
not be
periodic.
Nevertheless,
their determina-
tion will render
Economy
a science as exact as
many
of the
purely physical
sciences;
as
exact,
for
instance,
as
Meteorology
is
likely
to be for
a
very long
time to come.
The method of
determining
the function of
utility explained
above will
hardly apply,
how-
ever,
to the main elements of
expenditure.
The
h
Sir J. Herschel's
'
Meteorology,' Encyclopaedia
Britannica,
143-157.
142
The
Theory of
Political
Economy.
price
of
bread,
for
instance,
cannot be
properly
brought
under the
equation
used, because,
when
the
price
of bread rises
much,
the resources of
poor persons
are
strained,
money
becomes
scarcer with
them,
and
<^c,
the
utility
of
money,
rises. The natural result
is,
the lessen-
ing
of
expenditure
in other
directions;
that is
to
say,
all the wants of a
poor person
are
sup-
plied
to a less
degree
of satisfaction when food
is dear than when it is
cheap.
It is difficult to
see
exactly
how we are to
disentangle
these
effects and determine the variation of
\^c.
The
first
step,
no
doubt,
would be to ascertain what
proportion
of the
expenditure
of
poor people
goes
to
food,
at various
prices
of that food.
Great
difficulty
is thrown in the
way
of all
such
inquiries by
the vast differences in the
condition of
persons.
Opinions of
Economists on the Variation
of
Price.
There is no
difficulty
in
finding,
in works of
Political
Economists,
remarks
upon
the relation
between
any change
in the
supply
of a commo-
dity
and the
consequent
rise of
price.
The
general principles
of the variation of
utility
have been familiar to
many
writers.
Theory of Exchange.
143
As a
general
rule the variation of
price
is
much moref marked in the case of necessaries
of
life,
than in the case of luxuries. This
result
would follow from the fact observed
by
Adam
Smith,
that
'
The desire for food is limited in
every
man
by
the narrow
capacity
of the human
stomach
;
but the desire of the conveniences
and ornaments of
building,
dress,
equipage,
and
household
furniture,
seems to have no limit or
certain
boundary/
AsJ^
assert
that value de-
peiids_jipQn--desira
for
more,
it follows that
-any
excessive
supply
of food will lower its
price
very
much more than in the case of articles of
luxury.
Reciprocally
a
deficiency
of food will
raise its
pricfi^miich^
more than would
happen
in the case of less
necessary
articles^ This con-
clusion is in
harmony
with facts
;
for
CJialnaerls
says
*
:
'
The necessaries of life are far more
powerfully
affected in the
price
of them
by
a
variation-ia-iheir
quantity,
than are the luxu-
ries of life. Let the
crop
of
grain
be deficient
by
one-third in its usual
amount,
or
rather,
let
the
supply
of
grain
in the
market,
whether from
the home
produce,
or
by importation,
be cur-
tailed to the same
extent,
and this will create
Chalmers'
'
Christian and Economic
Polity
of a
Nation,'
voL ii.
p.
240.
144 The
Theory of
Political
Economy.
a much
greater
addition than of one-third to
the
price
of it. It is not an
unlikely prediction,
that its cost would be more than doubled
by
the
shortcoming
of one-third or one-fourth
in
the
supply/
He
goes
on to
explain,
at consi-
derable
length,
that the same would not
happen
with such an article as rum. A.
deficiency
in
the
supply
of rum from the
West^
Indies would
occasion a rise of
price,
but not to
any great
extent,
because there would be a substitution
of other kinds of
spirits,
or else a reduction in
the amount consumed. Men can live without
luxuries,
but not without necessaries.
A fail-
ure in the
general supply
of esculents to the
extent of
one-half,
would more than
quadruple
the
price
of the first necessaries of
life,
and
would fall with
very aggravated pressure
on
the lower orders. A failure to the same ex-
tent in all the
vineyards
of the
world,
would
most
assuredly
not raise the
price
of wine to
anything
near this
proportion. RathejuJtjian
pay
four times the wonted
price
for
{Burgundy,
there would be a
general
descent to
clare%
or
from that to
port,
or from that to the home-
made wines of our own
country,
or from that
to its
spirituous,
or from that to its fermented
Theory of Exchange.
145
liquors
k
/ He
points
to
sugar especially
as an
article which would be
extensively
thrown out
of
consumption by any great
rise
in
price
1
,
because it is a
luxury,
and at the same time
forms a considerable element in
expenditure.
But he thinks
that,
if an article occasions a
total
expenditure
of
very
small
amount,
varia-
tions of
price
will not much affect
consumption.
Speaking
of
nutmeg,
he
says
:
*
There is not
sixpence
a
year
consumed of
it for each
family
in Great Britain
;
and
per-
A--
haps
not one
family
that
spends
more than a
guinea
on this article alone. Let the
price
then be doubled or
trebled;
this will have
no
perceptible
effect on the
demand;
and the
price
will far rather be
paid,
than that the
wonted
indulgence
should in
any degree
be
foregone
The same holds true of
cloves^
and
cinnamon,
and
Cayenne pepper,
and all the
precicms spiceries
of the East
;
and it is
thus,
that
while,
in the
general,
the
price
of neces-
saries differs so
widely
from that of
luxuries,
in
regard
to the extent of
oscillation,
there
is a remarkable
approximation
in this matter
k
Chalmers' 'Christian and Economic
Polity
of a
Nation,'
vol. ii.
p.
242.
1
find.
p.
251.
146 The
Theory of
Political
Economy.
between the
very
commonest of these
neces-
saries and the
very
rarest of these luxuries
111
/
In these
interesting
observations
Chalmers
correctly distinguishes
between
the effect
of
desire for the
commodity
in
question
and that
for other commodities. The
price
of
nutmeg
does not
appreciably
affect the
general supply
of other
things,
and the
equation
on
p.
112 there-
fore
correctly applies.
But if
sugar
be
scarce,
to consume as before would necessitate a reduc-
tion of
consumption
in other directions
;
and as
the
degree
of
utility
of more
necessary
articles
rises much more
rapidly
than that of
sugar,
it
is the latter article which is thrown out of use
by preference.
This is a far more
complex
case,
which includes also the case of corn and
all
large
articles of
consumption.
Dr. Chalmers' remarks on the
price
of
sugar
are
strongly supported by
facts
concerning
the
course of the
sugar
markets in 1855-6. In the
year
1855,
as is stated in Tooke's
'
History
of
Prices
V
attention was
suddenly
drawn to a
considerable reduction which had taken
place
in the stocks of
sugar.
The
price rapidly
ad-
vanced,
but before it had reached the
highest
m
Chalmers' 'Christian and Economic
Polity
of a
Nation,'
vol. ii.
p.
252.
n
Vol. v.
p.
324,
&c.
Theory of Exchange.
147
point
the demand became almost
wholly
sus-
pended.
Not
only
did retail dealers avoid
replenishing
their
stocks,
but there was an im-
mediate and sometimes entire cessation of con-
sumption among
extensive classes. There were
instances
among
the retail
grocers
of their not
selling
a
single pound
of
sugar
until
prices
receded to what the
public
was satisfied was a
reasonable rate.
It is
very
curious that
in_this__sujt)ject,
which
reaches to the
very
foundations of Political
Economy,
we owe
more
to~
early
than
later
writers*
^
Before our science could be said to
exist at
all,
writers on Political Arithmetic had
got quite
as far as we at
present
are. In a
pamphlet
of 1737
,
it is remarked that
'
People
who understand trade will
readily agree
with
me,
that the tenth
part
of a
commodity
in a
market,
more than there is a brisk demand
for,
is
apt
to lower the
market,
perhaps, twenty
or
thirty per
cent.
;
and that a
deficiency
of a tenth
part
will cause as exorbitant an advance/ Sir
J.
Dalrymple
P,
again, says
:
'
Merchants
observe,
that if the
commodity
in
market is diminished one-third beneath its mean
quantity,
it will be
nearly
doubled
in
value;
Quoted by
Lord Lauderdale.
P
Ibid.
L a
148 The
Theory of
Political
Economy.
and that if it is
augmented
one-third above
its
mean
quantity,
it will sink near one-half in its
value;
or
that,
by
further
diminishing
or
aug-
menting
the
quantity,
these
disproportions
be-
tween the
quantity
and
prices vastly
increase/
To the
'
Spectator
%'
again,
we owe the
conjec-
ture,
that the
production
of one-tenth
part
more
grain
than is
usually
consumed would diminish
the value of the
grain
one-half. I know no-
thing
more
strange
and discreditable to stat-
ists and
economists,
than that in so
important
a
point
as the relations of
'price
and
supply
of
the main article of
food,
we owe our most accu-
rate accounts to writers who lived from a cen-
tury
and a half to two
centuries
ago.
There is
a certain celebrated estimate of the variation of
the
price
of corn which I have found
quoted
in
innumerable works on
Economy.
It is com-
monly
attributed to
Gregory King,
whose name
should be held in honour as one
of
the fathers
of Statistical Science in
England.
Born at
Lichfield in
1648,
King
devoted himself much
to mathematical
studies,
and was often occu-
pied
in
surveying.
His
principal public ap-
pointments
were that of Lancaster Herald and
Q
No.
200,
quoted by
Lauderdale.
'
Inquiry
into Public
Wealth,'
second
edition,
pp.
50,
51.
Theory of Exchange.
149
Secretary
to the Commissioners of Public Ac-
counts
;
but he is known to fame
by
the
remarkable statistical tables
concerning
the
population
and trade of
England,
which he
completed
in the
year
1696. His treatise was
entitled
'
Natural and Political Observations
and Conclusions
upon
the State and Condition
of
England,
1696';
but was never
printed
in
the author's lifetime. The contents
were,
how-
ever,
communicated in the most liberal manner
to Dr.
Davenant,
who founded
thereupon
his
*
Essay upon
the Probable Methods of
making
a
People gainers
in the Balance of Trade
r
,'
making
suitable
acknowledgments
as to the
source of his information. Our
knowledge
of
Gregory King's
conclusions was derived from
this and other
essays
of
Davenant,
until Chal-
mers
printed
the whole treatise at the end of
the third edition of his well-known 'Estimate
of the
Comparative Strength
of Great Britain/
The estimate of which I am about to
speak
is
given by
Davenant in the
following
words
8
:
'
We take
it,
that a defect in the harvest
may
raise the
price__of^co^rin
the
following pro-
portions
:
r
'
The Political and Commercial Works of Charles Dave-
nant,'
vol. ii.
p.
163.
8
Ibid,
p.
224.
150
The
Theory of
Political
Economy.
Defect.
Theory of Exchange.
151
Many
writers have commented on this esti-
mate. Thornton*
observes,
that it is
probably
exceedingly
inaccurate,
and that it is not clear
whether the total
stock,
or
only
the harvest of
a
single year,
is to be taken as deficient. Tooke
u
,
however,
than whom on such a
point
there
would be no
higher authority,
believes that
Gregory King's
estimate 'is not
very
wide of
the
truth,
from observation of the
repeated
occurrence of the fact that the
price
of corn
in this
country
has risen from one hundred to
two hundred
per
cent, and
upwards
when the
utmost
computed deficiency
of the
crops
has
not been more than between one-sixth and one-
third of an
average/
I have endeavoured to ascertain the law to
which Davenant's
figures
conform,
and the ma-
thematical function obtained does not
greatly
differ from what we
might
have
expected.
It
is
probable
that the
price
of corn should never
sink
to
zero, as,
if
abundant,
it could be used
for
feeding
horses,
poultry,
and
cattle,
or for
other
purposes
for which it is too
costly
at
present.
It is said that in America corn has
*
'An
Inquiry
into the Nature and Effects of the
Paper
Credit of Great
Britain,'
pp. 270,
271.
u
'
History
of
Prices,'
vol. i.
pp.
13-15.
152 The
Theory of
Political
Economy.
been
occasionally
used as fuel. On the other
hand,
when the
quantity
is much
diminished,
the
price
should rise
rapidly,
and should become
infinite before the
quantity
is
zero,
because
famine would then be
impending.
The substi-
tution of
potatoes
and other food renders the
famine
point very
uncertain
;
but I think that
a total
deficiency
of corn could not be made
up Jby
other food. Now a function of the form
-
)
fulfils these
conditions;
for it becomes
infinite when x is reduced to
6,
but for
greater
values of x
always
decreases as x increases.
An
inspection
of the
figures
shows that n is
prob-
ably
about
equal
to
2,
and
assuming
it as
such,
I have found that the most
probable
values of
a and 6 are
a
=
.824 6
=
.12.
The formula thus becomes
.824
price
of corn
=
-
-5
,
or
approximately,
=
^
.
The
following
numbers show the
degree
of
approximation
between the first of these for-
mulae and the data of Davenant
Theory of Exchange.
153
Harvest 1.0 .9 .8 .7 .6 .5
Price
(Davenant)
1.0 1.3 1.8 2.6 3.8 5.5
Price calculated.. 1.06 1.36 1.78 2.45 3.58 5.71.
I cannot undertake to
say
how near Dave-
nant's estimate
agrees
with
experience;
but,
considering
the close
approximation
in the
above
numbers,
we
may safely
substitute the
5
empirical
formula
-j-
'
^
f r ms
numbers;
and there are other reasons
already
stated for
supposing
that this formula is not far from
the truth.
There is further reason for
believing
that the
price
of corn varies more
rapidly
than in the
inverse ratio of the
quantity.
Mr. Tooke esti-
mates
x
that in 1795 and 1796 the farmers of
England gained
seven millions
sterling
in each
year by
a
deficiency
of
one-eighth part
in
the wheat
crop,
not
including
the considerable
profit
on the rise of
price
of other
agricultural
produce.
In each of the
years
1799 and
1800,
again,
farmers
probably gained
eleven millions
sterling by deficiency.
If the
price
of wheat
varied
inversely
as the
quantity, they
would
neither
gain
nor
lose,
and the fact that
they
gained agrees
with our formula
given
above.
x
'
History
of Prices.'
154
The
Theory of
Political
Economy.
The variation of
utility
has not been over-
looked
by
mathematicians,
who had
observed,
as
long ago
as the
early part
of last
century,
before,
in
fact,
there was
any
science of Poli-
tical
Economy
at
all,
that the
theory
of
prob-
abilities could not be
applied
to commerce or
gaming
without
taking
notice of the
very
dif-
ferent
utility
of the same sum of
money
to dif-
ferent
persons. Suppose
that an even and fair
bet is made between two
persons,
one of whom
has
10,000
a
year,
the other 100 a
year;
let
it be an
equal
chance whether
they gain
or lose
50. The rich
person
will,
in neither
case,
feel
much difference
;
but the
poor person
will receive
far more harm
by losing
50 than he can be
benefited
by gaining
it. The
utility
of
money
|
to a
poor person
varies
rapidly
with the
Amount ;
'
to a rich
person
less so. Daniel
IjffinJojftlli,
accordingly, distinguished
between the .moral
expectation
in
any question
of
probabilities
and
the
maj^en^iioj^^expectation^^e
latter
being
the
simple
chance of
obtaining
some
possession,
the former the chance combined with its
utility
to the
person. Having
no means of ascertain-
ing numerically
the variation of
utility,
Ber-
nouilli had to make various
assumptions
of an
arbitrary
kind,
and was then able to obtain
Theory of Exchange.
155
reasonable answers to
many important ques-
tions. It is almost self-evident that the
utility
of
money
decreases as a
person's
total wealth
increases
;
if this be
granted,
it follows at once
that
gaming
is,
in the
long
run,
a sure loss
;
that
every person
should,
when
possible,
divide
risks,
that
is,
prefer
two
equal
chances of 50
to one similar chance of 100
;
and the advan-
tage
of insurance of all kinds is
proved
from
the same
theory. Laplace
drew a similar dis-
tinction between the
fortune physique,
the actual
amount of a
person's
income,
and the
fortune
morale,
or its benefit to
On the
Origin of
Value.
The
preceding pages
contain,
if I am not
mistaken,
an
explanation
of the nature of value
which
will,
for the most
part,
harmonise with
previous
views
upon
the
subject.
Ricardo
stated,
like most other
economists,
that
utility
is
absolutely
essential to value
;
but that
'
pos-
sessing utility,
commodities derive their ex-
changeable
value from two sources : from their
scarcity,
and from the
quantity
of labour re-
y
Todhunter's
'
History
of the
Theory
of
Probability,' chap.
xi. &c.
156 The
Theory of
Political
Economy.
quired
to obtain them
2
.'
Senior,
again,
has
admirably
defined
wealth,
or
objects possessing
value,
as
*
those
things,
and those
things only,
which are
transferable,
are limited in
supply,
and are
directly
or
indirectly productive
of
plea-
sure or
preventive
of
pain.' Speaking only
of
things
which are
transferable,
or
capable
of
being passed
from hand to
hand,
we find that
the two clearest statements of the nature of
r
'
s
TT^
*
^">>
value
available,
recognise utility
and
&xtrcit]/)as
the
requisites.
But the moment that we dis-
tinguish
between the total
utility
of a mass
of^commbdity aridTlhedegree oflrfility^of
^dif-
ferent
portion^jwe jnay say
that the
scarcity
is that which
prevents
the fall
in_jthe_final
degree
flfjutilitv.
Bread has the almost infinite
utility
of
maintaining
life,
and when it becomes
a
question
of life or
death,
a small
quantity
of
food exceeds in value all other
things.
But
when we
enjoy
our
ordinary supplies
of
food,
a loaf of bread has little
value,
because the
utility
of an additional loaf is
small,
our
appe-
tite
being
satiated
by
our
customary
meals.
I have
pointed_put
the
excessive
ambiguity
of HnWord
Value,
and the
apparent impossi-
7-
'
Principles
of Political
Economy
and
Taxation,'
third
edition,
p.
2.
Theory of Exchange.
157
bility
of
safely using
it. When usecM^
express
the
mere fact of certain articles
exchanging
in
a
particular ratio,
I have
proposed
to substitute
the
unequivocal expression
ratio
of exchange.
BuFTjjm incjinedjobelieve
that a ratio is
notj
the
^meaning
Avliich most
persons
attach to the
wor<Cxaiue;
There is a certain sense of
esteem,
of
desirableness,
which we
may
have with re-
gard
to a
thing apart
from
any
distinct con-
sciousness of the ratio in which it would ex-
change
for other
things.
I
may suggest
that
this distinct
feeling
of value is
probably
iden-
tica1[_with
the
final
degree
of
utility.
While
Adam Smith's often
quoted
value in use is the
total
utility
of a
commodity
to
us,
the value in
exchange
is defined
by
the terminal
utility,
the
remaining
desire which we or others have for
possessing
more.
There remains the
question
of labour as an
element of value. There have not been want-
ing
economists who
put
forward
labour
jis
the
f
cause
of
value,
asserting
that all
objects
derive
tEeirvalue from the fact that labour has been
expended
on
them;
and it is even
implied,
if
not
stated,
that value
will^e
"
tional to labour. This is a
doctrine which can-
not stand for a
moment,
being
directly
opposed
158 The
Theory of
Political
Economy.
to facts. Ricardo
disposes
of such an
opinion
when he
says
a
:
*
There are some
commodities,
the value of which is determined
by
their scar-
city
alone. No labour can increase the
quantity
of such
goods,
and therefore their
v^lue
cannot
be lowered
by
an increased
supply./
Some rare
statues and
pictures,
scarce books and
cpins,
wines of a
peculiar quality,
which can
only
be made from
grapes grown
on a
particular
soil,
of which there is a
very
limited
quantity,
are all of this
description.
Their value is
wholly independent
of the
quantity
of labour
originally necessary
to
produce
them,
and varies
with the
varying
wealth and inclinations of
those who are desirous to
possess
them/
The mere
facMbhaJL_there__are
many things,
such as rare ancient
books, coins,
antiquities,
which have
high
values,
and which are abso-
lutely incapable
of
production
now,
disperses
the notion that value
depends
on labour. Even
those
things
which are
producible
in
any quan-
tities
by
labour seldom
exchange exactly
at
the
corresponding
values. The market
price
of
corn, cotton, iron,
and most other
things
is,
in the
prevalent
theories of
value,
allowed to
a
'
Principles
of Political
Economy
and
Taxation,'
third
edition,
p.
2.
Theory of Exchange.
159
fluctuate above or below its natural or cost
value. There
may, again,
be
any discrepancy
between the
quantity
of labour
spent upon
an
object
and the value
ultimately Attaching
to it.
A
great undertaking
like the Great Western
Railway,
or the Thames
Tunnel,
may embody
a vast amount of
labour,
but its value
depends
entirely upon
the number of
persons
who find
it useful. If no use could be found for the
Great Eastern steam
ship,
its value would be
nil,
except
for the
utility
of some of its mate-
rials. On the other
hand,
a successful under-
taking,
which
happens
to
possess great utility,
may
have a value for a
time,
at
least,
far ex-
ceeding
what has been
spent upon
it,
as in the
case of the Atlantic cable. The fact
is,
tha
labour once
spent
has no
influence
on the
futwr
value
of any
article : it is
gone
and lost fo
ever. In
commerce,
by-gones
are for ever
by-
gones
;
and we are
always starting
clear at each
moment,
judging_the values_ofthings
with a
view to future
utility. Industry
is
essentially
prospective,
not
retrospective;
and seldom does
the result of
any undertaking exactly
coincide
with the first intentions of its founders.
But
though
labour is never the cause of
value,
it is in a
large proportion
of cases the
160 The
Theory of
Political
Economy.
determining
circumstance,
and in the
following
way
: Value
depends solely
on the final
degree
ofutUity1__How
can we
vary
this
degree
of
utility? By having
more or less of the com-
modity
to consume. And how shall-.we
get
more or less of it?
By spending
more or less
labour in
obtaining
a
supply. According
to this
view, then,
there are two
steps
between labour
and value. Labour affects
supply,
and
supply
affects the
degree
of
utility,
which
governs
value,
or the ratio of
exchange.
But it is
easy
to
go
too far in
considering
labour as the
regulator
of value
;
it is
equally
to be remembered that
labourite.
equal
value.
Ricarod,
by
a violent
assumption
founded
his
theory
of value on
quantities
of
labour considered as one uniform
thing.
was aware that labour differs
...infinitely
in
quality
and
efficiency,
so that each kind is more
>|
or
jgsjTgiparce,
and
is
consequently paid
at a
higher
or lower rate of
wages.
He
regarded
these differences as
disturbing
circumstance
jf
fl which would have to be allowed for
;
but
I
p
theory
rests
on the assumed
equality
of labour.
,
(jfhis
theor^
rests on a
wholly
different
ground.
t|
tf I mfl&-4alroiir to be
essentially
va
/
*"iq
l hfa
s" thsrt.
;
;
,v'/s value must be determined
Ijy
the value
jof_the
\
Theory of Exchange.
161
produce,
not the value
of
the
produce
^u^thnt. nf
the labour. I hold it to be
impossible
to com-
pare
d
priori
the
productive powers
of a
navvy,
a
carpenter,
an
iron-puddler,
a
schoolmaster,
and a
barrister.
Accordingly,
it will be found
that not one of
my equations represents
a*\\
comparison
between one man's labour and an-
other's. The
equation,
if there is one at
all,
is
between the same
person
in two or more dif-
ferent
occupations.
The
subject
is one in which
complicated
action and re-action takes
place,
and which we must defer until after we have
described,
in the next
chapter,
the
Theory
of
Labour.
CHAPTER
V.
THEORY
OF
LABOUR.
Definition of
Labour.
As Adam Smith
said,
'
The real
price
of
everything,
what
every-
thing really
costs to the man who wants
to
acquire
it,
is the toil and trouble of
acquiring
it Labour was the first
price,
the
original purchase-money,
that was
paid
for all
things
.'
Labour is the
beginning
of the
processes
treated
by
economists,
as
consumption
is the
end and
purpose.
Labour is the
painful
exer-
tion which we
undergo
to ward
pff
pains
of
greater
amount,
or to
procure pleasures
which
leave a balance in our favour. Courcelle-
a
'
Wealth of
Nations,'
book i.
chap.
5.
Theory of
Labour. 163
Seneuil
b
and Hearn have stated the
problem
of
Economy
with the utmost truth and
brevity
in
saying,
that it is to
satisfy
our wants with the
least sum
of
labour.
In
defining
labour for the
purposes
of the
economist we have a choice o,
two courses :
we
may,
if we
like,
include in
body
or mind. A
game
of cricket
would,
in
this
sense,
be labour
;
but if it be undertaken
solely
for the sake of the
enjoyment attaching
to
it,
we need
scarcely
take it under our notice.
All exertion not directed to a distant and dis-
tinct end must
necessarily
be
repaid
simul-
taneously.
There is no account of
good
or
evil to be balanced at a future time. We are
not
prevented
in
any way
from
including
such
cases in our
Theory
of
Economy;
in
fact,
our
Theory
of Labour
will,
of
necessity, apply
to
them. But we need not
occupy
our attention
by
cases which demand no calculus. When
we exert ourselves for the sole amusement of
the
moment,
there is but one rule
needed,
namely,
to
stop
when we feel inclined when
the
pleasure
no
longer equals
the
pain.
It will
probably
be
better, therefore,
to con-
t>
'
Trait^
Theorique
et
Pratique
d'Economie
Politique/
2nd
edition,
vol. i.
p.
33.
M 2
164 The
Theory of
Political
Economy.
centrate our attention on such exertion as is
only subsequently repaid.
This
agrees exactly
with
Say's
definition of labour as
'
Action
suivee,
dirigee
vers un but.'
(
ofi-bady
nrwind.
he view to
future
</oo_dL-
It is true that
labour
may
be both
agreeable
and conducive
to future
good;
but it is
only agreeable
in a
limited
amount,
and most men are
compelled
by
their wants to exert themselves
longer
and
more
severely
than
they
would otherwise doO
When a labourer is inclined to
stop,
he
clearly
feels
something
that is
irksome,
and our
theory
will
only
involve the
point
where the exertion
has become so
painful
as to
nearly
balance all
other considerations. Whatever there is that
is wholesome or
agreeable
about labour before
it reaches this
point may
be taken as a net
profit
of
good
to the labourer
;
but it does not
enter into the
problem.
It is
only
when labour
becomes effort that we take account of
it, and,
as Hearn
truly says
c
,
'
such
effort,
as the
very
term seems to
imply,
is more or less trouble-
some.' In
fact,
we
must,
as will
shortly appear,
measure labour
by
the amount of
pain
which
attaches to it.
c
Plutology,' p.
24.
Theory of
Labour. 165
Quantitative
'Notions
of
Labour.
Let us endeavour to form a clear notion of
what we mean
byCamount
of
.tehaurx*
It is
plain
that duration will oe one element of it
;
for a
person labouring uniformly during
two months
must be allowed to labour twice as much as
during
one month. But labour
may^yary
also
in
intensity.
In the same tune a man
may
walk a
greater
or less
distance;
may
saw a
greater
or less amount of timber
;
may pump
a
greater
or less
quantity
of
water;
in
short,
may
exert more or less muscular force. Hence
amount of labour will be a
quantity
of two
dimensions,
the
product
of
intensity
and time
when the
intensity
is
uniform^)
or the sum
repre-
sented
by
the area of a curve when it is variable.
(
But the
intensity
of labour
may
have
more|
than one
meaning
;
it
may
be measured
by
the
quantity
of work
done,
or
by
the
painfulness
of
the effort of
doing
it. These two circumstances
must be
carefully distinguished,
and both are
of
great importance
for the
theory.
)(
The one
is the
reward,
the other the
penalty,
of
labour.}
And,
indeed,^
as the
produce
is
only
of interest
to us so far as it
possesses utility,
we
may say
that there are three
quantities
involved in a
166 The
Theory of
Political
Economy.
problem
of labour the amount of
painful
ex-
ertion,
the amount of
produce,
and the-amount
as
depend
-
ing
on -the
q.uajitit3z~ofLcommodity
possessed!)
has
already
been considered
;
the variation of the
amount of
produce
will be treated in the next
chapter
;
we will here
give
attention to the law
of the
painfulness
of labour.
(
Abundant
experience
shows
that^asjabour
is
prolonged
the effort becomes
rapidly
more and
more
painful.
A few hours' work
per day may
be considered
agreeable
rather than
otherwise;
but so
soon as
the
spontaneous energy
of the
body
is drained
off,
it becomes irksome to re-
main~ofc-~woBk. As
complete
exhaustion
ap-
proaches,
continued effort becomes more and
more
intolerable.)
Mr.
Jennings
has so
clearly
stated this law of the variation of
labour,
that
I must
quote
his words
d
.
'
Between these two
points,
the
point
of
incipient
effort and the
point
of
painful suffering,
it is
quite
evident
that the
degree
of toilsome sensations endured
does not
vary directly
as the
quantity
of work
performed,
but increases much more
rapidly,
like the resistance offered
by
an
opposing
me-
dium to the
velocity
of a
moving body.
d
'Natural Elements of Political
Economy,' p.
119.
Theory of
Labour. 167
'
When this ohservation comes to be
applied
to the toilsome sensations endured
by
the work-
ing
classes,
it will be found convenient to fix
on a middle
point,
the
average
amount of toil-
some sensation
attending
the
average
amount
of
labour,
and to measure from this
point
the
degrees
of variation.
If,
for the sake of illus-
tration,
this
average
amount be assumed to be
of ten hours
duration,
it would follow
that,
if
at
any period
the amount were to be
supposed
to be reduced to five
hours,
the sensations of
labour would be
found,
at least
by
the
majority
of
mankind,
to be almost
merged
in the
plea-
sures of
occupation
and
exercise,
whilst the
amount of work
performed
would
only
be di-
minished
by
one
half; if,
on the
contrary,
the
amount were to be
supposed
to be increased
to
twenty
hours,
the
quantity
of work
produced
would
only
be
doubled,
whilst the amount of
toilsome
suffering
would become
insupportable.
Thus,
if the
quantity produced, greater
or less
than the
average,
were to be divided into
any
number of
parts
of
equal magnitude,
the amount
of toilsome sensation
attending
each
succeeding
increment would be found
greater
than that
which would attend the increment
preceding;
and the amount
attending
each
succeeding
de-
168 The
Theory of
Political
Economy.
crement would be found less than that which
would attend the decrement
preceding/
There can be no
question
of the
general
truth
of the
statement,
although
we
may
not have
the data for
assigning
the exact law of the
variation.
( We
may imagine
the
painfulness
of labour in
proportion
to
produce
to be re-
presented by
some such curve as abed in
Fig.
VIII. In this
diagram
the
height
of
points
above the line ox denotes
pleasure,
and
depth
below it
pain.)
At the moment of
commencing
labour it is
always
more irksome than when
the mind and
body
are well bent to the work.
Thus,
at
first,
the
pain
is measured
by
oa. At
6
there is neither
pain
nor
pleasure.
Between
Theory of
Labour, 169
b and
c(a
small excess of
pleasure
is
represented
as due to the exertion itself.
/
But after c the
energy begins
to be
rapidly
exhausted,
and the
resulting pain
is shown
by
the
increasing
ten-
dency
downwards of the line cd. But we
may
at the same time
(represent
the
utility
of the
produce by
some such curve as
pq,
the amount
of
produce,
or the
day's
wages,]
being
measured
along
the line ox.
( Agreeably
to the
theory
of
utility, already given,
the curve shows that the
larger
the
wages
earned the less is the
pleasure
derived from a further
increment.)
There
will,
of
necessity,
be some
poiritl^
such that
qm
=
dm,
XJ"
r
where the
pleasure
gainejo.
is
exactly equal
to
thft lfl.hnnr
finding/
Now, if WPI
pass
the least
beyond
this
point,
a balance of
pain
will result :
there will be an
ever-decreasing
motive in favour
of
labour,
and an
ever-increasing
motive
against
it.
)
The
labpoirer_will
evidently
cease^tbftn,
pt.
tha
point
m.
/It
would be inconsistent with human
nature for a man to work when the
pain
of
work exceeds the desire of
possession,
and all
the motives for exertion.
We
usually
consider the duration of labour
as measured
by
the number of hours' work
per
day.
The alternation of
day
and
night
on the
earth has rendered man
essentially periodic
in
170 The
Theory of
Political
Economy.
his habits and actions. In a natural or whole-
some condition a man must be considered as
returning
each
twenty-four
hours to
exactly
the same state
; or,
at
any
rate,
the
cycle
must
be closed within the seven
days.
Thus the
labourer must not be
supposed
to be either
increasing
or
diminishing
his normal
strength.
But the
theory might
also be made to
apply
to
cases where
special
exertion is
undergone
for
many days
or weeks in
succession,
in order to
complete
a
work,
as in
collecting
the harvest.
Adequate
motives
may
lead to and warrant
over
work, but,
if
long
continued,
it reduces the
strength
and becomes
insupportable
;
and the
longer
it continues the worse it
is,
the law
being
somewhat similar
to that of
periodic
labour,
Symbolic
Statement
of
the
Theory.
We must
represent
with
accuracy
these con-
ditions of
labour,
and we shall find that there
are no less than four
quantities
concerned.
Let
us
represent
these
quantities
as follows
=
time,
or duration of labour.
I amount of
labour,
as
meaning
the
ag-
gregate
balance of
pain accompanying
it,
irrespective
of the
produce.
Theory of
Labour.
171
x
=
amount of
commodity produced.
u total
utility
of that
commodity.
The amount of
commodity produced
will be
very
different in different cases. In
any
one
case the rate of
production
will be determined
by dividing
the whole
quantity produced by
the
time of
production, provided
that the rate of
production
has been uniform
;
it will then be
/y
-. But if the rate of
production
be
variable,
L
it can
only
be determined at
any
moment
by
comparing
an
indefinitely
small
quantity
of
produce
with the
indefinitely
small
portion
of
time
occupied
in its
production.
Thus the rate
CM *Y
of
production
is
properly
denoted
by
-*- .
Again,
the
degree
of
painfulness
of labour
would be
-
if the
degree
remained
invariable;
V
but as it is
highly
variable, and,
in
fact,
in-
creases with
t,
we must
again compare
small
increments,
and
, or,
at the
limit,
cor-
AC at
rectly represents
the
degree of painfulness of
labour. But we must also take into account
the
fact,
that the
utility
of
commodity
is not
constant. If a man works
regularly
twelve
hours a
day,
he will
produce
more
commodity
172 The
Theory of
Political
Economy.
than in ten hours
;
therefore the final
degree
of
utility
of his
commodity,
whether he consume
it himself or
exchange
it,
will not be
quite
so
high
as when he
produced
less. This
degree
of
utility
is
denoted,
as
before,
by
^
the ratio
of the increment of
utility
to the increment of
commodity.
The amount of reward of labour can now be
expressed
;
for it is
-^
.
^-
;
that
is,
it
depends
upon
the
compound
ratio of the
commodity
produced
to the
time,
and the
utility
to the
amount of
produce.
For
instance,
the last two
hours of work in the
day may give
less
reward,
both because less
produce
is then
created,
and
because that
produce
is less
necessary
and
useful to one who makes
enough
to
support
himself in the other ten hours.
We can now
readily
define the
length
of time
which will be
naturally
selected as the best
term of labour.
A_^e^_JaJboui^r--^udiire_the
irksomeness of work because the
pleasure
he
receiyesTor^the
pain
ae wards ofl'
by
means of
the
produce,
exceeds the
pain
of exertion. When
labour itself is a worse evil than what it saves
him
from,
there can be no motive for further
Theory of
Labour.
173
exertion,
and he ceases. Therefore he will cease
tolabour
just
at that
point
when the
pain
exactly equals
for a moment the
corresponding
pleasure acquired
;
and we thus have t denned
by
the
equation"""
*dl
_
dx du
dt dt
'
dx
In
this,
as in the other
questions
of
Economy,
all
depends upon
the final
increments;
and we
have
expressed
in the above formula the
final
equivalence of
labour and
utility.
A man must
be
regarded
as
earning
all
through
his hours of
labour an excess of
utility;
what he
produces
must be considered not
merely
the exact
equi-
valent of the labour he
gives
for
it,
for it would
be,
in that
case,
a matter of indifference whether
he laboured or not. As
long
as he
gains,
he
labours,
and when he ceases to
gain,
he ceases
to labour.
In
many
cases,
as for instance in machine
labour,
the rate of
production
is
uniform,
and
by
choice of suitable units
may
be made
equal
to
unity;
the result
may
then be
put
more
simply
in this
way.
Labour
may
be considered
as
expended
in successive small
quantities,
A,
each
lasting,
for
instance,
for a
quarter
of
an hour
;
the
corresponding
benefit derived
174 The
Theory of
Political
Economy.
from the labour will then be denoted
by
Now,
so
long
as
&u
exceeds in amount of
pleasure
the
negative quantity
or
pain
of
A,
there will be a
gain inducing
to continued
labour. Were AW
to fall below
A/,
there would
positively
be more harm than
good
in labour-
ing ; therefore,
the
boundary
between labour
and
inactivity
will be denned
by
the exact
equality
of
A
u and
A
I, or,
at the limit between
du
,
dl
-y-
ana
-j-
;
ax ax
and we have the
equation
du
_
dl
L dx
~
dx
"^
Balance between Need and Labour.
In
considering
this
Theory
of
Labour,
an
interesting question presents
itself.
Supposing
that circumstances alter the relation of
produce
to
labour,
what effect will this have
upon
the
amount of labour which will be exerted ? There
are two effects to be considered. When labour
produces
more
commodity,
there is more re-
ward,
and therefore more inducement to labour.
If a workman can earn
ninepence
an hour in-
stead of
sixpence, may
he not be induced to
extend his hours of labour
by
this increased
Theory of
Labour. 175
result ? This would doubtless be the case were
it not that the
very
fact of
getting
half as much
more than he did before, lowers the
utility
to
<j
him of
any
further addition.
By
the
produce
of the same number of hours he can
satisfy
his
desires to a
higher point;
and if the irksome-
ness of labour has reached at all a
high point,
he
may gain
more
pleasure
.
by relaxing
that
labour than
by consuming
more
products.
The
question
thus
evidently depends upon
the direc-
tion in which the balance between the
utility
of further
commodity
and the
painfulness
of
labour turns.
In our
ignorance
of the exact character of
the functions either of
utility
or of
labour,
it
will be
impossible
to decide this
question
in an
d
priori
manner
;
but there are a few facts
which indicate in which direction the balance
does
usually
turn. Statements are
given by
Mr.
Porter,
in his
'Progress
of the Nation
6
/
which show that when a sudden rise took
place
in the
prices
of
provisions
in the
early part
of
this
century,
workmen increased their hours of
labour, or,
as it is
said,
worked double time if
they
could
obtain
adequate employment.
Now,
a rise in the
price
of food is
really
the same as
Edition of
1847,
pp.
454,
455.
176 The
Theory of
Political
Economy.
a decrease of the
produce
of
labour,
since less
of the necessaries of life can be
acquired.
We
may
conclude, then,
that
English
labourers en-
joying
little more than
thejnecessarie^
of
THE,
will work harder the less
theproduce
; or,
which
is the
same,
will work less hard as the
produce
increases.
Evidence to the same effect is found in the
general
tendency
to reduce the hours of labour
at the
present day, owing
to the
improved
real
wages
now
enjoyed by
those
employed
in mills
and factories.
Artisans, mill-hands,
and others
generally,
seem to
prefer greater
ease to
greater
wealth,
thus
proving
that the
degree
of
utility
varies more
rapidly
than the
degree
of
painful-
ness of labour. The same rule seems to hold
throughout
the mercantile
employments.
The
richer a man
becomes,
the less does he devote
himself to the
business. A successful merchant
is
generally willing
to
give
a considerable share
of his
profits
to a
partner,
or a staff of
managers
and
clerks,
rather than bear the constant labour
of
superintendence
himself. There is also a
general tendency
to reduce the hours of labour
in mercantile
offices,
due to increased comfort
and
opulence.
But there are
many exceptions
to this rule
Theory of
Labour.
177
furnished
by
those learned
professions
where
the work is of a more
interesting
and
exciting
character. A
successful
solicitor, barrister,
or
physician
generally
labours more
severely
as his
success increases. This result
may partly
arise
from the fact that the work is not
easily capable
of
being
refused or
performed by deputy.
But
the
case of an eminent architect or
engineer
is
one where the work is to a
great
extent done
by employees,
and where
yet
the most success-
ful man endures the most
labour,
or rather is
most
constantly
at work. This indicates that
the
irksomeness of the labour does not increase
so as to
pass beyond
the
degree
of
utility
of
the
increasing
reward.
It is evident that
questions
of this kind will
depend
greatly upon
the character of the race.
Persons of an
energetic disposition
feel labour
less
painful
than
they
otherwise
would, and,
if
they happen
to be endowed with various and
acute
sensibilities,
their desire of further
acqui-
sition never ceases. A man
oLJflwer race,
a
negro
for
instance,
enjoys possession
less,
and
loathes labour more
;
his
exertions, therefore,
soon
stop.
A
poor savage
would be content to
gather
the almost
gratuitous
fruits of
nature,
if
they
were sufficient to
give
sustenance
;
it
N
178 The
Theory of
Political
Economy.
is
only physical
want which drives him to
exertion. The rich man in modern
society
is
supplied apparently
with all he can
desire,
and
yet
he often labours
unceasingly
for more.
Bishop Berkeley,
in his
'
Querist
f
/
has
very
well
asked,
*
Whether the
creating
of wants
be
not the likeliest
way
to
produce industry
in a
people
? And
whether,
if our
(Irish) peasants
were accustomed to eat beef and wear
shoes,
they
would not be more industrious?'
Distribution
of
Labour.
We now come to consider the conditions
which will
regulate
the
comparative
amount of
different commodities
produced
in a
country.
Theoretically speaking,
we
might regard
each
person
as
capable
of
producing
various commo-
dities,
and
dividing
his labour
according
to cer-
tain rules between the different
employments;
it would not be
impossible,
too,
to mention
cases where such division does take
place.
But
the result of commerce and the division of la-
bour is to make
every
man find his
advantage
in
performing
one trade
only
;
and I
give
the
formulae as
they
would
apply
to an
individual,
only
because
they
are identical in form with
those which
apply
to a whole nation.
f
Query
No. 20.
Theory of
Labour. 179
Suppose
that an individual is
capable
of
pro-
ducing
three kinds of
commodity.
His sole
object,
of
course,
is to
produce
the
greatest
amount of
utility;
but this will
depend partly upon
the
comparative degrees
of
utility
of the commodi-
ties,
and
partly
on his
comparative
facilities for
producing
them. Let
x,
y,
z be the
respective
quantities
of the commodities
already produced,
and
suppose
that he is about to
apply
more
labour;
on which
commodity
shall he
spend
the next increment of labour ?
Plainly,
on
that which will
yield
most
utility. Now,
if one
increment of
labour, A?,
will
yield
the incre-
ments of
commodity
A#,
A^/,
AZ,
the ratios of
producejtojabour
AJ/
A3
A!' AT A~7
will be one element in the
problem.
But to
obtain
the
comparative utility
of
thesje_jncre-
must
multiply by
A
U
2
AZ
For
instance,
expresses
the amounf of
utility
which can be I )
obtained
by producing
a little more of the first
N 2
180 The
Theory of
Political
Economy.
commodity;
if this be
greater
than the same
expression
for the other
commodities,
it would
evidently
be best to make the first
commodity
until it ceased to
yield any
excess of
utility.
Whftrijjifi
]a.frnnr
is
finally
distributed,
we
ought
1 to
haveJthe
increments of
utility
from each em-
ployment equal,
and at the limit we have the
dx
_
du
2
dy
_
du
s
dz
dx dl
t
dy
'
dl
2
dz
'
dl
s
these
equations
hold,
there can be no
motive for
altering
or
regretting
the distribu-
tion of
labour,
and the
utility produced
is at
its
maximum.
There are in this
problem
three unknown
quantities,
l
lf
1
2 ,
1
3 ,
the three
portions
of labour
appropriated
to the three commodities.
To de-
termine
them,
we
require
one other
equation
in addition to the above. If we
put
we have still an unknown
quantity
to deter-
mine,
namely,
I;
but the
principles
of labour
(see pp.
170-4)
now
give
us an
equation.
La-
bour will be carried on until the increment of
utility
from
any
of the
employments just
ba-
lances the increment of
pain.
Theory of
Labour. 181
Relation
of
the Theories
of
Labour and
Exchange.
It
may
tend to
give
the reader confidence
in the
preceding
theories when he finds that
they
lead
directly
to the well-known and almost
selfjgyidentlasv,
that_articles
which can he
pro-
duced
Jn^
greater
^r
less
quantity exchange
in>
proportion
to their cost of
production.
The ratio
of
exchange
of commodities
will,
as a
fact,
con-
form in the
long
run to the ratio of
production.
To
simplify
our
expressions,
let us substi-
fa-x]
tute for the ratio of
production
(
v
-Wthe
symbol
w. Then
*r
lt
*r
z
,
w
3
express
the relative
quan-
tities of the different commodities
produced by
an increment of
labour,
and we have the fol-
lowing equations,
identical with those on the
last
page.
$x
\
WJL
=
^y;
.
r
a
=
yz
.
^
Let us
suppose
that
$he person
td whom
they
apply
is in a
position
to
exchange
with other
persons.
The conditions of
production
will
now,
in all
probability,
be modified. For x the
quan-
tity
of our
commodity may perhaps
be increased
to #
+
#!,
and
y
diminished to
yy^, by
an
182 The
Theory of
Political
Economy.
exchange
of the
quantities
x and
y
lt
If this
be
so,
we
shall,
as shown in the
Theory
of
Exchange,
have the
equation
|i
_
Our
equation
of
production
will
now
be modi-
fied,
and become
4
But this
equation
has its first member identical
with the first member of the
equation
of ex-
change given
above,
so that we
may
at once
deduce the
all-important equation
The reader will remember that
expresses
the ratio of
produce
to
labour;
thus we have
proved
that commodities will
exchange
in
any
marketin
the_
ratio of the
quantities produced
by
thesame
quantity
of labour.
But as the
increment of labour considered is
always
the
final
one,
our
equation
also
expresses
the
truth,
that articles
wittjixchw^^
asjJkp.
r.ns
of production
of
the most
costly por-
tions,
i. e. the last
portions
added. This last
Theory of
Labour.
183
point
will
prove
oj: great_
importance
in the
theory
o
Rent/
Let it be observed
that,
in
uniting
the theo-
ries of
exchange
and
production,
a
complicated
double
adjustment
takes
place
in the
quantities
of
commodity
involved. Each
party
adjusts
not
only
its
consumption
of articles in accordance
with their ratio of
exchange,
but it also
adjusts
its
production
of them. The ratio of
exchange
governs
the
production
as
tion
governs
the ratio of
exchange.
For in-^
stance,
since the Corn Laws have been abolished
in
England,
the effect has
been,
not to
destroy
the culture of
wheat,
but to lessen it. The
land less suitable to the
growth
of wheat
has been turned to
grazing
or other
purposes
more
profitable comparatively speaking.
Simi-
larly
the
importation
of
hops
or
eggs
or
any
other article of food does not even reduce the
quantity
raised
here,
but
prevents
the
necessity
for
resorting
to more
expensive
modes of
gain-
ing
a
supply.
It is not
easy
to
express
in
words
how the ratios of
exchange
are
finally
deter-
mined.
They depend upon
a
general
balance
of
producing power
and of demand as measured
by
the final ratio of
utility. Every
additional
supply
tends to lower the
degree
of
utility
;
but
'-
184 The
Theory of
Political
Economy.
whether that
supply
will be
forthcoming
from
any country depends upon
its
comparative
powers
of
producing
different commodities.
Any very
small tract of
country
cannot
ap-
preciably
affect the
comparative supply
of com-
modities : it must therefore
adjust
its
produc-
tions in accordance with the
general
state of
the market. The
county
of
Bedford,
for in-
stance,
would not
appreciably
affect the markets
for
corn, cheese,
or
cattle,
whether it devoted
every
acre to .corn
or to
grazing.
Therefore
the
agriculture
of Bedfordshire will have to be
adapted
to
circumstances,
and each field will
be
employed
for arable or
grazing
land accord-
ing
as
prevailing prices
render one
employment
or the other more
profitable.
But
any large
country
will affect the markets as well as be
affected. If the whole habitable surface of
Australia,
instead of
producing
wool,
could be
turned to the . cultivation of
wine,
the wool
market would
rise,
and the wine market fall.
If the Southern States
of America abandoned
cotton in favour of
sugar,
there would be a
revolution in these markets. It would be in-
evitable for Australia to return to wool and
the American States to cotton. These are illus-
trations of the
reciprocal
relation of
exchange
and
production.
Theory of
Labour.
185
Various Cases
of
the
Theory.
As we have now reached the
principal ques-
tion in Political
Economy,
it will be well to
consider the
meaning
and results of our
equa-
tions in some detail.
It
will,
in the first
place,
he
apparent,
that
the absolute
facility
of
producing
commodities
will not determine the character and amount
of trade. The ratio of
exchange
is not de-
termined
by
OT!,
nor
by^TlTeparately,
"but
tlieir~comparative magnitude.
,
If the
producing
power
of a
country
were
doubled,
no direcl
effect would be
produceo_i^iQiL_lU^terins~^rits
\
commerce if the increase were
equal
in all
branches of its
production.
This is a
point
of
^^
"
/
Jx*v-~y*^ .<-
^
">. X^
great_iniportmice, -wJiich^aa^ecarectlxjcQaceived
by
Eicardo,
and has been
fully explained
Mr. Mil'
But
though
there is no such direct
effect,
it
may happen
that there will be an indirect effect
through
the variation in the
degree
of
utility
of different articles. When an increased amount
of
eyery^cpmmodity
can be
produced^Jt-ia-Bot
likely
that the increase wHTbe
equally desired^
186 The
Theory of
Political
Economy.
in-^eaeh branch of
consumption.
Hence the
degree
of
utility
will fall in some cases more
than others. An alteration of the ratios of ex-
change
must
result,
and the
production
of the
less needed commodities will not be extended so
much as in the case of the more needed ones.
We
might
find in such instances new
proofs
that value
depends
not
upon
labour but
upon
the
degree
of
utility.
It will also be
apparent,
that nations
possess-
ing exactly
similar
powers
of
production
cannot
gain by
mutual
commerce,
and
consequently
will not have
any
such
commerce,
however
free from artificial restrictions. We
get
this
result as follows Let
t^
r
2
be the final ratios
of
production
in one
country,
and
^
n
z
in a
second
;
then,
if the
conditions_j)f production
are
exactly
similar.
But when a
country
does not trade at
all,
its
labour and
consumption
is distributed accord-
ing
to the condition
Now,
from these
equations,
it follows necessa-
rily,
that
Theory of
Labour.
187
x
that is to
say,
the
production
and
consumption
already
conform to the conditions of
produc-
tion of the second
country,
and will not
undergo
any
alteration when trade with this
country
becomes
possible.
This is the doctrine
usually
stated in works
on Political
Economy,
and for which there are
good grounds.
But I do not think the state-
ment will hold true if the conditions of con-
sumption
be
very
different in two countries.
There
might
be two countries
exactly
similar
in
regard
to their
powers
of
producing
beef and
corn,
and if their habits of
consumption
were
also
exactly
similar,
there would be
np_Jrade
in
these__articles.
But
suppose
that the first
country
consumed
proportionally
more
beef,
and the second more
corn; then,
if there were
no
trade,
the
powers
of the soil would be dif-
ferently
taxed,
and different ratios of
exchange
would
prevail.
Freedom of trade would cause
an
interchange
of corn for beef. Thus I should
conclude,
that it is
jmly
where the
hahit
*f
as^
well as the
powers
of,
.produce
tion,
are
alike,
that trade
brings
no
advantage.
The
general
effect of
foreign
commerce is to
188
The
Theory of
Political
Economy.
disturb,
to the
advantage
of a
country,
the
mode in which it distributes its labour. Ex-
cluding
from view the cost of
carriage,
and the
other
expenses
of
commerce,
we must
always
have true
If, then,
CT
2
was
originally
in less
proportion
to
CT!
than is in accordance With these
equa-
tions,
some labour will be transferred from the
production
of
y
to that of x
until,
by
the in-
creased
magnitude
of
<&
2
,
and the lessened
magnitude
of
Wl,
equality
is
brought
about.
As in the
theory
of
exchange,
so in the
theory
of
production, any
of the
equations may
fail,
and the
meaning
is
capable
of
interpreta-
tion.
Thus,
if the
equation
cannot be
established,
it is
impossible
that the
production
of both
commodities,
y
and
x,
can
go
on. One of them will be
produced
at an
expenditure
of labour
constantly
out of
propor-
tion to that at which it
may
be had
by exchange.
If we could
not,
for
instance,
import oranges
from
abroad,
part
of the labour of the
country
would
probably
be diverted from its
present
Theory of
Labour.
189
employment
to raise
them,
but the cost of
pro-
duction would be
always
above that of
getting
them
indirectly by exchange,
so that free trade
necessarily destroys
such a wasteful branch of
industry.
It is on this
principle
that we im-
port
the whole of our
wines, teas,
sugar,
coffee,
spices,
and
many
other articles from abroad.
The ratio of
exchange
of
any
two commodi-
ties will be determined
by
a kind of
struggle
between the conditions of
consumption
and
pro-
duction
;
but here
again
failure of the
equa-
tions
may
take
place.
In the
all-important
equations
w-
2 expresses
the ease with whicliwe
may], r
make additions to
y.
If we find
any
means,
by
machinery
or
otherwise,
of
increasing y
without
limit. aiid
L_with_the
same ease as
Jbeforc^
we?
must,
in all
probability,
alter^theratio
of
ex-/
y
change-J^Mna
corresponding degree.
But if
x
i
we could
imagine
the existence of a
large popu-
lation,
within reach of the
supposed country,
whose
desire to consume the
quantity
y^
never
decreased,
however
large
was the
quantity
available,
then we should never
have.
--
1
equaLto-
190
The
Theory of
Political
Economy.
-,
and the
producers
of
y
would make
large
gains
of the nature of rent.
Of Over-production.
The
theory
of the distribution of labour
enables us to
perceive clearly
the
meaning
of
over-production
in trade.
Early
writers on
Economy
were
always
in fear of a
supposed
glut, arising
from the
powers
of
production
surpassing
the needs of
consumers,
so that
industry
would be
stopped, employment
fail,
and all but the rich would be starved
by
the
superfluity
of commodities. The doctrine is
evidently
absurd and
self-contradictory.
As
the
acquirement
of suitable commodities is
the whole
purpose
of
industry
and
trade,
the
greater
the
supplies
obtained the more
per-
fectly industry
fulfils its
purpose.
A universal
glut
is
really
the
maximising
of the results of
labour,
which is the
problem
of the economist.
But the
supplies
must be suitable that
is,
they
must be in
proportion
to the needs of the
popu-
lation.
Over-production
is not
possible
in all
branches of
industry
at
once,
but it is
possible
in
some as
compared
with others.
If,
by
a
miscalculation,
too much labour is
spent
in
Theory of
Labour.
191
producing
one
commodity, say
silk
goods,
our
equations
will not hold true.
People
will be
more satiated with silk
goods
than
cotton,
wool-
len or other
goods. They
will
refuse, therefore,
to
purchase
them at ratios of
exchange
corre-
sponding
to the labour
expended.
The
pro-
ducers will thus receive in
exchange goods
of
less
utility
than
they might
have
acquired by
a better distribution of
their
labour.
In
extending industry,
therefore,
we must be
careful to extend it
proportionally
to all the
requirements
of the
population.
The more we
can lower the
degree
of
utility
of all
goods by
satiating
the desires of the
purchasers
the bet-
ter
;
but we must lower the
degrees
of
utility
of different
goods
in a
corresponding
manner,
otherwise there is an
apparent glut
and a real
loss of
labour.
Limits to the
Intensity of
Labour.
I
have mentioned
(p. 165)
that labour
may
vary
either in duration or
intensity,
but have
yet paid
little attention to the latter circum-
stance. We
may_approximately
measure_the
intensity^
of labour
by
the amount of
physical
force
undergone
in a certain
time,
although
it
is the
pain attending
that exertion of force
192 The
Theory of
Political
Economy.
which is the
all-important
element in
Economy.
Interesting
laws have been or
may
be detected
connecting
the amount of work done with the
intensity
of labour. Even where these laws
have not been
ascertained,
long experience
has
led
men,
by
a sort of unconscious
reasoning,
to
select that rate of work which is most advan-
tageous.
Let us take such a
simple
kind of work as
digging.
A
spade may
be made of
any
size,
and if the same number of strokes be made in
the
hour,
the exertion
requisite
will
vary nearly
as the cube of the
length
of the blade. If
the
spade
be
small,
the
fatigue
will be
slight,
but the work done will also be
slight.
A
very
large spade,
on the other
hand,
will do a
great
quantity
of work at each
stroke,
but the
fatigue
will be so
great
that the labourer cannot
long
continue at his work.
Accordingly,
a certain
medium-sized
spade
is
adopted,
which does not
overtax a labourer and
prevent
him
doing
a
full
day's
work,
but enables
him to
accomplish
as much as
possible.
The size of a
spade
should
depend partly upon
the
tenacity
and
weight
of
the
material,
and
partly upon
the
strength
of
the labourer. It
may
be observed
that,
in ex-
cavating
stiff
clay,
navvies use a small
strong
Theory of
Labour.
193
spade ;
for
ordinary garden purposes
a
larger
spade
is
employed;
for
shovelling
loose sand
or coals a broad
capacious
shovel is used
;
and
a still
larger
instrument is
employed
for re-
moving
corn, malt,
or
any
loose
powder.
In most cases of muscular exertion the
weight
of
the
body
or of some limb is of
great import-
ance. If a man be
employed
to
carry
a
single
letter,
he
really
moves a
weight
of
say
a hun-
dred and
sixty pounds
for the
purpose
of con-
veying
a letter
weighing perhaps
half an ounce.
There will be no
appreciable
increase
of labour
if he carries two letters or
twenty
letters,
so
that his
efficiency
will be
multiplied twenty
times. A hundred
letters would
probably
prove
a
slight
burden,
but there would still
be a vast
gain
in the work done. It is ob-
vious, however,
that we
might go
on
loading
a
postman
with letters until the
fatigue
be-
came excessive
;
the maximum useful result
would be obtained with the
largest
load which
does not
severely fatigue
the
man,
and trial
soon decides the
weight
with considerable
accuracy.
The most favourable load for a
porter
was
investigated by
Coulomb,
and he found that
most work could be done
by
a man
walking up-
o
194 The
Theory of
Political
Economy*
stairs without
any
load,
and
raising
his burden
by
means of his own
weight
in
descending.
A
man could thus raise four times as much in a
day
as
by carrying bags
on his back with the
most favourable load. This
great
difference
doubtless arises from the muscles
being per-
fectly adapted
to
raising
the human
body,
/whereas
any
additional
weight
throws
irregu-
lar or undue stress
upon
them. Mr.
Babbage,
also,
in his admirable
*
Economy
of Manufac-
tures'
(p.
30),
has remarked on this
subject,
and
has
pointed
out that the
weight
of some limb
of the
body
is an element in all calculations of
human labour.
It occurred to
me,
some time
since,
that this
was a
subject admitting
of
interesting inquiry,
and I tried to
determine,
by
several series of
experiments,
the
relatioa^between
the amount
*
->4__
~~
'
of
work_donej>y
certain
muscles^and the_rate
of
f&tigue^/^OnQ
series consisted
in
holding
weights varying
from one
pound
to
eighteen
pounds
in the hand while the arm was stretched
out at its full
length.
The trials were two hun-
dred and
thirty-eight
in
number,
and were made
at intervals of at least one
hour,
so that the
fatigue
of one trial should not
derange
the next.
The
average
number of seconds
during
which
Theory of
Labour.
195
each
weight
could be sustained
was found to
be as follows
Weight
in
pounds
18 14 10 7 4 2 1
Time in seconds .. 15 32 60 87 148 219 321.
If the arm had been thus
employed
in
any
kind of useful
work,
we should have estimated
the useful effect
by
the
product
of the
weight
sustained and the tune. The results would be
as
follows,
in
pound-seconds
Weight
.. .. .. .. 18 14 10 7 4 2 1
Useful effect .... 266 455 603 612 592 438 321.
The maximum of useful effect would here
appear
to be about seven
pounds,
which is
about the
weight usually
chosen for dumb-
bells or other
gymnastic
exercises. Details of
the other series of
experiments
are described in
an article in Nature
(30th
June, 1870,
vol. ii.
p. 158).
I undertook these
experiments
as a mere
illustration of the mode in which some of the
laws
forming
the
physical
basis of Political
Economy might
be ascertained. I was unaware
that Professor S.
Haughton
had
already, by
jfl
^theory
of muscular
action^
communicated to the
Royal Society
in
1862. I was
grajjfie4^tojjjid
thfl,t,
my rnth-ftly
\,
independent
result
proge^-to
be
ia^striking
^
o 2
196
The
Theory of
Political
Economy.
as was
pointed
out
by
Professor
Haughton
in two articles
in
Nature s.
I am not aware that
any
exact
experiments
upon
walking
or
marching
have been
made,
but,
as Professor
Haughton
has remarked to
me,
they might easily
be carried out in the
movements of an
army.
It would
only
be ne-
cessary,
on each march which is carried
up
to
the limits of
endurance,
to
register
the time and
distance
passed
over. Had we a determination
of the exact relations of
time,
space,
and
fatigue,
it would be
possible
to solve
many interesting
problems.
For
instance,
if one
person
has to
overtake
another,
what should be their com-
parative
rates of
walking
?
Assuming
the
fatigue
to increase as the
square
of the
velocity
multi-
plied by
the
time,
I
easily
obtained
an exact
solution,
showing
that the total
fatigue
would
be least when the
person goes
twice as
quickly
as him whom he wishes to overtake.
In different cases of muscular exertion
we
shall find
Different
problems
to solve. The
most
advantageous
rate of
niarchingjwiUjgreatly
depend upon
whether the loss of time or the
fatigue
is the most
important.
Great
rapidity,
g
Vol. ii.
p.
324
;
vol. iii.
p.
289,
Theory of
Labour.
197
for instance four or four and a half miles an
hour,
would soon occasion enormous
fatigue,
and could
only
be resorted to when there
was
great urgency.
The distance
passed
over
would bear a much
higher
ratio to the
fatigue
at the rate of three or two and a half miles an
hour. But if the
speed
were still further re-
duced,
a loss of
strength
would
again
arise,
owing
to that
expended
in
merely
sustaining
the
body
as
distinguished
from that of
moving
it forward.
The Political
Economy
of Labour will con-
stantly
involve
questions
of this
kind. When
a work has to be
completed
in a brief
space
of
tune,
workmen
may
be incited
by
unusual re-
ward to do far more than their usual amount
of work
;
but so
high
a rate would not be
profitable
in other circumstances. The
fatigue
always rapidly
increases when the
speed
of
work
passes
a
certain
point,
so that the extra
result is far more
costly
in
reality.
In a
regu-
lar and constant
employment
the
greatest
re-
sult will
always
be
gained by
such a rate as
allows a workman each
day,
or each week at
the
most,
to recover all
fatigue
and
recommence
with an undiminished store of
energy,
CHAPTER VI.
THEORY OF RENT.
Accepted Opinions concerning
Rent.
THE
general
correctness of the views
put
forth in
preceding chapters
derives
great prob-
ability
from their close resemblance to the
Theory
of
Rent,
as it has been
accepted by
English
writers for
nearly
a
century.
It has
not been usual to state this
theory
in mathe-
matical
symbols,
and
clumsy
arithmetical illus-
trations have been
employed
instead
;
but it is
easy
to show that the fluxional calculus is the
branch of mathematics which most
correctly
applies
to the
subject.
The
Theory
of Rent was first discovered and
clearly
stated
Jjy^JamesJtn'aerson
in a tract
published'
kulW^nacalled
'Ah
Inquiry
into
the Nature of the Corn
Laws,
with a view to
the Corn Bill
proposed
for Scotland/ An ex-
Theory of
Rent. 199
tract from this work
may
be found in Mr.
Culloch's edition of the
'
Wealth of
^Nations,'
p.
453,
giving
a most clear
explanation
of the
effect of the various
fertility
of
land,
/and show-
ing
that it is not the rent of land
which deter-
1|
mines the
price
of its
produce,
but the
price
of'
the
produce
which determines the rent of
the
land. The
following passage
must be
given
in
Anderson's own words
a
:
'
. . . In
every country
there is a
variety
of
soils,
differing considerably
from one another in
point
of
fertility.
These we shall at
present
suppose arranged
into different
classes,
which
we shall denote
by
the letters
A, B, C, D, E, F,
&c.,
the class A
comprehending
the soils of the
greatest fertility,
and the other letters
express-
ing
different classes of
soils,
gradually
decreas-
ing
in
fertility
as
you
recede from the first.
Now,
as the
expense
of
cultivating
the least
fertile soil is as
great,
or
greater
than that of
the most fertile
field,
it n
cessarily
follows,
that
if an
equal quantity
of
corn,
the
produce
of
each
field,
can be sold at the
same
price,
the
profit
on
cultivating
the most fertile soil must
be much
greater
than that of
cultivating
the
others;
and as this continues to
decrease as
a
'
Inquiry,'
&c.
p.
45
;
note.
200
The
Theory of
Political
Economy.
the
sterility increases,
it must at
length hap-
pen,
that the
expense
of
cultivating
some of
the inferior
soils will
equal
the value of the
whole
produce.'
The
theory really
rests
upon
the
principle
already
enumerated
(p. 91),
that for the same
commodity
in the same market there can
only
he one
price
or ratio of
exchange.
Hence,
if
different
qualities
of land
yield
different amounts
of
produce
to the same
lahour,
there must be
an excess of
profit
in some over others. There
will be some land which will not
yield
the ordi-
nary wages
of
labour,
and which
will, therefore,
not be taken into
cultivation,
or
if,
by
mistake,
it is
cultivated,
will be abandoned. Some land
will
just pay
the
ordinary wages
;
better land
wHnyield
an
excess,
so that the
possession
of
such land will become a matter of
competition,
and the owner will be able to exact as rent
from the cultivators the whole excess above
what is sufficient to
pay
the
ordinary wages
of
labour.
There is a
secondary origin
for rent in the
fact,
that if more or less labour and
capital
be
applied
to the same
portion
of
land,
the
produce
will not
increase
proportionally
to the
amount of labour. It is
quite impossible
that
Theory of
Rent.
201
we could
go
on
constantly increasing
the
yield
of one farm without
limit,
otherwise we
might
feed the whole
country upon
a
single
farm.
Yet there is no definite limit
; for,
by
better
and better culture we
may always
seem able
to raise a little more. But the last increment
of
produce
will come to bear a smaller and
smaller ratio to the labour
required
to
produce
it,
so that it soon
becomes,
in the case of all
land,
undesirable to
apply
more labour.
<
8jr^
MacCuTIoct^
has
given,
in his edition of
Adam Smith's 'Wealth of Nations
13
/
a
supple-
mentary
note,
in which he
explains,
with the
utmost clearness and scientific
accuracy,
the
nature
of the
theory.
This note contains
by
far the best statement of the
theory,
as it seems
to
me,
and I will therefore
quote
his
recapitu-
lation of the
principles
which he establishes.
'
1. That if the
produce
of land could
always"
/
r J
be increased in
proportion
to the
out-/
^
T**
lay
on
it,
there would be no such
thing
as rent.
*2.
That the
produce
of land
cannot,
at an
average,
be increased in
proportion
to
the
outlay,
but
may
be
indefinitely
in-
creased
in a less
proportion.
b
New
edition, 1839,
p.
444.
202
The
Theory of
Political
Economy.
'
3. That the least
productive portion
of the
outlay,
which,
speaking generally,
is
the
last,
must
yield
the
ordinary pro-
fits of stock. And
'
4. That all which the other
portions yield
more than
this,
being
above
ordinary
profits,
is rent/
.A.
jtnost
satisiactory
account 01 tne
tneory
is
also
given
iiv^Mr"
James
]VBTr$i
'Elements of
Political
Economy/
a work which I never read
without admiration at its
brief, clear,
and
powerful style.
Mr. Mill uses
constantly
the
expression
dose
of capital.
'
The time
comes/
he
says,
'
at which it is
necessary
either
to have
..*-. i >,,. i -ii* ... 1.1
I*;**
y^
recourse to land of the second
quality,
or to
apply
a second dose of
capital
less
productively
,
upon
land of the first
qualify/
He
evidently
means
by
a dose
of capital
a little more
capi-
tal,
and
though
the name is
peculiar,
the mean-
ing
is that of an increment
of capital.
The
number of doses or increments mentioned is
only
three,
but this is
clearly
to avoid
prolixity
of
explanation.
There is no reason
why
we
should not consider the whole
capital
divided
into
many
more doses. The same
general
law
which makes the second dose less
productive
than the
first,
will make a hundredth
dose,
Theory of
Rent.
203
speaking generally,
less
productive
than the
pre-
ceding ninety-ninth
dose.
Theoretically speaking,
there is no need or
possibility
of
stopping
at
any
limit. A mathematical law is
always
continu-
ous,
so that the doses considered are
indefinitely
small olr
indefinitely
numerous. I
consider, then,
that Mr. James Mill's mode of
expression
is
exactly equivalent
to that which I have
adopted
in earlier
parts
of this book. As mathemati-
cians have invented a
precise
and
fully recog-
nised mode of
expressing
doses or
increments,
I
know not
why
we should exclude
language
from
Political
Economy
which is found convenient in
all other sciences.
The
following
are Mr. James Mill's
general
conclusions as to the nature of Rent
c
.
'
In
applying capital,
either to lands of various
degrees
of
fertility,
or in successive doses to the
same
land,
some
portions
of the
capital
so em-
ployed
are attended with a
greater produce,
some with a less. That which
yields
the
least,
yields
all that is
necessary
for
re-imbursing
and
rewarding
the
capitalist.
The
capitalist
will
receive no more than this remuneration for
any
portion
of the
capital
which he
employs,
be-
cause the
competition
of others will
prevent
c
'Elements,'
p.
17.
204 The
Theory of
Political
Economy.
him. All that is
yielded
ahove this remunera-
tion the landlord will he ahle to
appropriate.
Rent, therefore,
is the difference hetween the
return
yielded
tcT~tEat
portion
of the
capHaT
which is
employed
upon
the land with the
least
effect,
and that which is
yielded,
to all
the other
portions
employed upon
it with a
greater
effect/
Symbolic
Statement
of
the
Theory.
The
accepted Theory
of
Rent,
as
given
ahove,
needs little or no alteration to
adapt
it to ex-
pression
in mathematical
symhols.
For doses
or increments of
capital
I shall substitute incre-
ments of
labour,
partly
because the functions
of
capital
remain to be considered in the next
chapter,
and
partly
because Mr. James
Mill,
Mr. J. S.
Mill,
and Mr. MacCulloch hold the
application
of
capital
to be
synonymous
with
the
application
of labour. It is
implied
in Mr.
James Mill's statement
(p. 13)
;
it is
expressly
stated in Mr. J. S. Mill's
*
First Fundamental
Proposition concerning
the Nature of
Capital
d
;'
and Mr. MacCulloch adds a foot-note
e
to make
it
clear,
that as all
capital
was
originally pro-
d
Book i.
chapter
5,
1.
e
'
Wealth of
Nations,'
p.
445.
Theory of
Rent.
205
duced
by
labour,
the
application
of additional
capital
is the
application
of additional labour.
*
Either the one
phrase
or the other
may
be
used
indiscriminately.'
I shall
suppose
that a certain
labourer, or,
what comes to
exactly
the
same,
a
body
of
labourers,
expend
labour on several different
pieces
of
ground.
On what
principle
will
they
distribute their labour between the several
pieces?
Let us
imagine
that a certain amount
has been
spent upon
each,
and that another
small
portion,
A?,
is
going
to be
applied.
Let
there be three
pieces
of
land,
and let
A#I,
Aa?
2
A
#3
be the increments of
produce
to be ex-
pected
from the
pieces respectively. They
will
naturally apply
the labour to the land which
yields
the
greatest
result. So
long
as there is
any
advantage_jn_one
use of
labour nvAr an-
other,
the most advantageous
adopted.
Therefore,
when
they
are
perfectly
satisfied with the distribution
made,
the incre-
ment of
produce
to the same labour will be
equal
in each case
;
or we have
=
A
x
y
\
To attain scientific
accuracy,
we must decrease
the increments
indefinitely,
and then we obtain
the
equations
206 The
Theory of
Political
Economy.
dli
dl
z
~~
dls
'
Now
-~
represents
the ratio of
produce,
or_thg
productiveness
of
labour,
as
regards
the last
increment-Of
labour-applied.
We
may say,
then,
that whenever a labourer or
body
of labourers
distribute their labour over several
pieces
of
land with
perfect economy,
the
f/rialj)ratio^__oji_
produce
to
~~We~lnay
now take into account the
general
law,
that when more and more labour is
ap-
plied
to the same
piece
of
land,
the
produce
ultimately
does not increase
proportionally
'to\
x-//yi
the labour. This means that the function -=
~~dl
diminishes without limit after x has
passed
a
certainquantity.
The whole
produce oTapiece
1
'^
"
of land is
x,
the whole labour
spent upon
it is
I
;
and x varies in some
way
as I
varies,
never
decreasing
when I increases. We
may say,
then,
that
ojs^
JunctiojjLof
J
;
let us
alj_it_PZ.
When
_
a little more labour is
expended,
the increment
dPl
of
produce
jlxjiS
dPl,
and
=-
is the final rate
of
production,
the same as was
previously
de-
dx
noted
by
^
Theory of
Rent. 207
In the
Theory
of Labour it was shown that
no increment of labour would be
expended
unless there was sufficient
recompense
in the
produce,
but that labour would be
expended
up
to the
point
at which the increment of
utility exactly equals
the increment of
pain
incurred in
acquiring
it. Here we find an ex-
act definition of the amount of labour which
will be
profitably applied.
It was also shown that the last increment
of labour is the most
painful,
so that if a
person
is
recompensed
for the last increment
of labour which he
applies
to land
by
the
CM
/
7*
rate of
production
-^,
it follows that all the
labour he
applies might
be
recompensed
suffi-
ciently
at the same rate. The whole labour is
I,
so that if the
recompense
be
equal
over the
CM ^
whole,
the result would be I .
-^
.
Consequently,
he obtains more than the
necessary
return to
labour
by
the amount
PI -I
.
l
'dr
or,
as we
may
write
it,
Pl-l.Fl,
in which P'l is the differential coefficient of
PI,
208
The
Theory of
Political
Economy.
or the final rate of
production.
This
expression
represents
the
advantage
he derives from the
possession
of land in
affording
him more
profit
than other methods of
employing
his labour.
It is therefore the rent which he would ask
before
yielding
it
up
to another
person,
or
equally
the rent which he would be able and
willing
to
pay
if
hiring
it from another.
The same considerations
apply
to
every piece
of land
cultivated. When the same
person
or
body
of labourers cultivate several
pieces,
PI
will be the same
quantity
in each
case,
but the
quantities
of
labour,
and
possibly
the functions
of
labour,
will be different. Thus with two
pieces
of land the rent
may
be
represented
as
or,
speaking generally
of
any
number of
pieces,
it is the sum of the
quantities
of the form
PI,
minus the sum of the
quantities
1. PI.
Illustration
of
the
Theory.
It is
very easy
to illustrate the
Theory
of
Rent
by diagrams.
For,
let distances
along
the
line ox denote
quantities
of
labour^and
let the
curye
ape
represenjLthe
variation
^fjjie
rate _of
production,
so that the area of the curve will
Theory of
Rent. 209
production,
so that the area
_of
the curve will
be the measure of the
produce.
Thus when
labour has been
applied
to the amount
om,
the
produce
will
correspond
to the area
apmo.
Let
a small new increment of
labour, mm',
be
ap-
plied,
and
suppose
the rate of
production equal
over the whole of the increment. Then the
small
parallelogram, pp'mfm
will be the
produce.
This will be
proportional
in
quantity
to
pm,
so
that the
height
of
any point
of the curve
per-
pendicularly
above a
point
of the line ox
repre-
sents the rate of
production
at that
point
in
the
application
of labour.
If we further
suppose
that the labourer con-
siders his
labour, mm',
repaid by
the
produce
pm',
there is no reason
why any
other
part
of
his labour should not be
repaid
at the same
p
210 The
Theory of
Political
Economy.
rate.
Drawing,
then,
a horizontal
line,
rpq,
through
the
point p,
his whole
labour, om,
will
be
repaid by
the
produce represented by
the
area
orpm.
Consequently,
the
overlying
area,
rap,
is the excess of
produce
which can be
exacted from him as
rent,
if he be not himself
the owner of the land.
Imagining
the same
person
to cultivate an-
other
piece
of
land,
we
might
take the
curve,
bqc,
to
represent
its
productiveness.
The same
rate of
production
will
repay
the labourer in
this case as in the
last,
so that the intersection
of the same horizontal
line,
rpq
with the
curve,
will determine the final
point
of
labour,
n.
The
area, rn,
will be the measure of the suffi-
cient
recompense
to the whole
labour, on,
spent upon
the land
;
and the excess of
pro-
duce or rent will be the area
rbq.
In a simi-
lar
manner,
any
number of
pieces
of land
might
be considered. The
figure might
have
been drawn so that the curves would rise on
leaving
the initial line
oy,
indicating
that a
very
little labour will have a
poor
rate of
pro-
duction
;
and that a certain amount of labour
is
requisite
to
develop
the
fertility
of the soil.
This
may
often or
always
be the
case,
as a
considerable
quantity
of labour is
generally
Theory of
Rent. 211
requisite
in first
bringing
land into
cultivation,
or
merely keeping
it in a fit state for use. The
laws of rent
depend
on the undoubted
prin-
ciple,
that the curves
always ultimately
decline
towards the base line
ox,
that is the final rate
of
production
always
ultimately
sinks towards
zen
p 2
CHAPTER VII.
THEORY OF CAPITAL.
On the True Nature and
Definition of
Capital.
IN
considering
the nature and
principles
of
Capital,
we enter a distinct branch of our sub-
ject.
There is no close or
necessary
connection
between the
employment
of
capital
and the
processes
of
exchange.
Both
by capital
and
exchange
we are enabled
vastly
to increase the
sum of
utility
which we
enjoy;
but it is
just
conceivable that we
might
have the advant-
ages
of
capital
without those of
exchange.
An
isolated man like Alexander
Selkirk,
or an
isolated
family, might
feel the
great
benefit of
a stock of
provisions,
tools,
and other means
Theory of Capital
.
213
of
facilitating industry, although
cut off from
traffic with
any
others of the race. Political
Economy,
then,
is not
solely
the science of
Exchange
or Value : it is also the science of \.
Capital.
The views which I shall endeavour to estab-
lish on this
subject
are,
I
believe,
in funda-
mental
agreement
with those
adopted by
-Mr.
Ricardb;
but I shall
try
to
put
the
Theory
ot
Capital
in a more
simple
and consistent manner
than has been the case with some later econo-
mists. We are
told,
with
perfect
truth,
that
capital
consists of wealth
employed
to
facilitate
production ;
but when economists
proceed
to
enumerate the articles of wealth
constituting
capital, they
obscure the
subject.
'
The
capital
of a
country/ says
MacCulloch
a
,
'
consists or
those
portions
of the
produce
of
industry
exist-
ing
in
it,
which
may
be
directly employed
either
to
support
human
beings,
or to facilitate
pro-
duction/ Professor Fawcett
again says
b
:
'
Capi-
tal is not confined to the food which feeds the
labourers,
but includes
machinery, buildings,
and
in
fact,
every product
due to man's labour
which can be
applied
to assist his
industry;
a
'
Principles
of Political
Economy,' p.
100.
b
'
Manual of Political
Economy,'
second
edition,
p.
47.
214 Tlie
Theory of
Political
Economy.
but
capital
which is in the form of food does
not
perform
its functions in the same
way
as
capital
that is in the form of
machinery
: the
one is termed
circulating capital,
the other fixed
capital/
The notion of
capital
assumes a new
degree
of
simplicity
as soon as we
recognise
that what
has been called a
part
is
really
the whole.
_Car
4
pitaJL.
as I shall treat
hyconsists
merely
in the
aggregate of
those commodities which are re-
quired for sustaining
labourers
of any
kind or
class
engaged
in work. / A stock of-food is the
main element of
capital
;
but
supplies
of
clothes,
furniture^
and-allr the^-other articles in common
daily
use are also
neresary--par4s oiLcapital.
I/The
current means
of
sustenance constitute
capi-
fl
tal in its
free
or uninvested
form.
The
single
and
all-important purpose
of
capital
is to enable
the labourer to await the result of
any long-
lasting
work,
to
put
an interval between the
^beginning
and the end of an
enterprise.
/
Not
only
can
we,
by
the aid of
cajpital,
erect
large
works which would otherwise have been
impossible,
but the
production
of articles which
would have been
very costly
in labour
may
be
rendered far more
easy. Capital
enables us to
make a
great outlayliirproviding
tools, machines,
Theory of Capital.
215
or other
preliminary
works,
which have for their
sole
object
the
production
of some other com-
modity,
but which will
greatly
facilitate
produc-
tion when we enter
upon
it.
Several economists have
clearly perceived
that
Jbh&jfcime elapsing
between the
beginning
and,
end of a work is the
difficulty
which
capital
assists us to surmount. Thus one writer has
said
'
If the man who subsists on animals can-
not make sure of his
prey
in less than a
day,
he cannot have less than a whole
day's
subsist-
ence in advance.
If
hunting
excursions are
undertaken which
occupy
a week or a
month,
subsistence for several
days may
be
required.
It is
evident,
when men come to live
upon
those
productions
which their labour raises from the
soil,
and which can be
brought
to
maturity only
once in the
year,
that subsistence for a whole
year
must be laid
up
in advance/
Much more
recently,
Professor Hearn has
said,
in his admirable work entitled
'
Plutology
c
/
/The first and most obvious mode in which
capital directly operates
as an
auxiliary
of
industry
is to render
possible
the
performance
of work which
requires
for its
completion
some
c
'
Plutology
;
or the
Theory
of Efforts to
Satisfy
Human
Wants,"
1864
(Macmillan), p.
139.
216 The
Theory of
Political
Economy.
considerable
time/
In the
simplest agricultural
operations
there is the seed time and the har-
vest. A
vineyard
is
unproductive
for at least
three
years
before it is
thoroughly
fit for use.
In
gold mining
there is often a
long delay,
sometimes even of five or six
years,
before the
gold
is reached. Such mines could not be
worked
by poor
men unless the
storekeepers
gave
the miners
credit, or,
in other
words,
supplied capital
for the adventure.
But,
in
addition to this
great
result,
capital
also im-
plies
other
consequences
which are
hardly
less
momentous. One of these is the steadiness and
continuity
that labour thus
acquires.
A
man,
when aided
by capital,
can afford to remain at
his work until it is
finished,
and is not com-
pelled
to leave it
incomplete
while he searches
for the
necessary
means of subsistence. If there
were no accumulated fund
upon
which the la-
bourer could
rely,
no man could remain for a
single day exclusively engaged
in
any
other
occupation
than those which relate to the
sup-
ply
of his
primary
wants. Besides these
wants,
he should also from time to time search for
the materials
on which he was to work/
These
passages imply,
as it seems to
me,
a
clear
insight
into the nature and
purposes
of
Theory of Capital
217
capital, exgept
that the writers have not
sufficient boldness followed out the conse-
quences
of their notion. /If we take a
compre-
hensive view of the
subject,
it will be seen that
not
only
the
chief,
but the sole
purpose
of
capi-
tal is as above described.
Capital simply
allows
III
us to
expand
labour in
advance/
Thus,
to raise
/!{.
corn we need to turn over the surface of the
soil.
Jf
we
proceed straight
to the
work,
and
use
tfie
implements
with which nature has fur-
nished
us^^ur/ifiiigers
we should
spend
an
enormous
am^fant
of
painful
labour with
very
little
resujjb:
It is far
better, therefore,
to
spend
the first
part
of our labour in
making
a
spade
or other
implement
to
[assist
the rest of our
labour. This
spade represents
so much labour
which has been
invested,
and so far
spent
;
but
if it lasts three
years,
its cost
may
be consi-
dered as
repaid gradually during
those three
years.
This
labour,
like that of
digging,
has
for its
object
the
raising
of
corn,
and the
only
essential difference
is,
that it
has to
precede
the
production
of corn
by
a
longer
interval. The
average period
of time for which labour will
remain invested in the
spade
is half of the three
years. Similarly,
if we
possess
a
larger capital,
and
expend
it in
making
a
plough,
which will
218 The
Theory of
Political
Economy.
last for
twenty years,
we invest at the
beginning
a
great
deal of labour which is
only gradually
repaid during
those
twenty years,
and which
is,
on the
average,
invested
for ten
years.
It is true that in modern
industry
we should
never find the same man
making
the
spade
or
plough,
and afterwards
using
the
implement.
j
/The division of labour enables
me,
with much
l
advantage,
to
expend
a
portion
of
my capital
in
purchasing
the
implement
from some one
I
who devotes his attention to the
manufacture,
nd
probably expends capital previously
in faci-
litating
the work. But this does not alter the
principles
of the matter. What
capital
I
give
for the
spade merely replaces
what the manu-
facturer had
already
invested in the
expectation
that the
spade
would be needed.
Exactly
the
same considerations
may
be
applied
to much
more
complicated applications
of
capital.
The
ultimate
object
of all
industry engaged
with
cotton is the
production
of cotton
goods.
But
the
complete process
of
producing
those
goods
. is divided into
many parts
;
and it is
necessary
'
vto
begin
the
spending
of labour a
long
time
before
any goods
can be finished.
In the first
place,
labour will be
required
to till the land
which is to bear the cotton
plants,
and
probably
Theory of Capital
219
two
years
at least will
elapse
between the time
when the
ground
is first broken and the cotton
reaches the mills. A cotton
mill,
again,
if it be
efficient at
all,
must be a
very strong
and dur-
able
structure,
and must contain
machinery
of
a
very costly
character,
which can
only repay
its owner
by
a
long
course of
use. We
might
spin
and weave cotton
goods
as in former
times,
or as it is done in
Cashmere,
with a
very
small
use of
capital;
but then the labour
required
would be
enormously greater.
It is far more economical in the
end,
to
spend
a vast amount of labour and
capital
in
building
a substantial mill and
filling
it with the best
machinery,
which will
perhaps go
on
working
with
unimpaired efficiency
for
say twenty years.
This means
that,
in addition to the labour
spent
in
superintending
the machines at the moment
when
goods
are
produced,
a
great quantity
of
labour has been
spent
from one to
twenty years
in
advance, or,
on the
average,
ten
years
in
advance.
This
expenditure
is
repaid by
an
j
annuity
of
profit extending
over those
twentyA
years.
The interval
elapsing
between the first exer-
tion of labour and the
enjoyment
of the result
is further increased
by any
time
during
which
220 The
Theory of
Political
Economy.
the raw material
may
lie in
warehouses
before
reaching
the machines
;
and
by
the time em-
ployed
in
distributing
the
goods
to retail
dealers,
and
through
them to the consumers.
It
may
even
happen
that the consumer finds it desirable
to
keep
a certain stock on
hand,
so that the
time when the real
object
of the
goods
is
fulfilled becomes still further deferred.
During
this
time, also,
capital
seems to me to be in-
vested,
and
only
as actual
consumption
takes
place
is
expenditure repaid by corresponding
utility enjoyed.
I would
say,
then,
in the most
general
man-
ner,
that whatever
improvements
in the
supply
of
commodities
lengthen
the
average
interval be-
tween the moment when
any
labour is exerted and
its ultimate result or
purpose
accomplished,
re-
quire
the use
of
capital.
^J^LJ^^^^^^J^f
this
is-N^OeoL&v^us^irf
capital.
Whenever
we
overlook the irrelevant
complications
introduced
by
the division of labour and the
frequency
of
exchange,
all
employments
of
capital
resolve
themselves into the fact of time
elapsing
be-
tween the
beginning
and the end of
industry.
Theory of Capital
221
Quantitative
Notions
concerning Capital.
One main
point
which has to be
clearly
brought
before the mind in this
subject
is the
difference between the,- amount
of
capital
in-
vested and
t1^~ammmL.Qj[
investment
of capital.
a
quantity
of
one^dimension
only
the
quantity
of
capital;
the second is a
quan-
tity
of two
dimensions,
namely,
the
quantity
of
capital,
and the
length
of time
during
which it
remains
invested.
If one
day's
labour remains
invested for two
years,
the
capital
is
only
that
equivalent
to one
day
;
but it is locked
up
twice
as
long
as if there were
only
one
year's
invest-
ment. Now all
questions
in which we consider
the most
advantageous employment
of
capital
turn
upon
the
length
of investment
quite
as
much as
upon
the amount. The same
capital
will serve for
twice..as
much
industry
if it be
absorbed or invested for
only
half the time,
r,
~
-
-j-
~~~
-^
r\
The amount of investment of
capital
will evi\
dently
be determined
by multiplying
each
por-
\
tion of
capital
invested at
any
moment
by
the
length
of time for which it remains invested.
/
,
One
pound
invested for five
years gives
the/A?
same result as
fivepounds
invested/for one year.
|
the
product
being five pmidr^eays.
Most com-
222 The
Theory of
Political
Economy.
monly,
however,
investment
proceeds
continu-
ously
or at
intervals,
and we must form clear
notions on the
subject.
Thus,
if a workman be
employed during
one
year
on
any
work,
the
result of which is
complete,
and
enjoyed
at the
end of that
time,
the
absorption
of
capital
will
be found
by multiplying
each
day's wages by
the
days remaining
till the end of the
year,
and
adding
all the results
together.
If the
daily
wages
be four
shillings,
then we have
4x364
+ 4x363 + 4x362
+4x0;
365 x 364
or,
4
x or
265,720
shilling days.
We
may
also
represent
the investment
by
a
diagram
such as
Fig.
X. The
length along
the
line ox indicates the duration of
investment,
Fig.X
and the
height
attained at
any point,
a,
is the
amount of
capital
invested. But it is the
whole area of the
rectangles up
to
any point,
a,
which measures the amount of investment.
I The whole result of continued labour is not
Theory of Capital
223
often consumed and
enjoyed
in a moment
;
the
result
generally
lasts. We must then conceive
the
capital
as
i^jng prngr.psivp]j
Let
us,
for sake of
simple
illustration,
imagine
the labour of
producing
the harvest to be con-
tinuously
and
equally expended
between the
first of
September
in one
year
and the same
day
in the next. Let the harvest be then
completely gathered
and its
consumption
be-
gin,
to continue
equally during
the
succeeding
twelve months. Then the amount of invest-
ment of
capital
will be
represented by
the area
of an isosceles
triangle,
as in
Fig.
XI,
the base
of
which
corresponds
to two
years
of
duration.
Now the area of a
triangle
is
equal
to the
height
multiplied by
half
the
base
;
and as the
height
represents
the
greatest
amount
invested,
that
upon
the first of
September,
when the harvest
is
gathered ;
half the
base,
or one
year,
is the
average
time
of
investment
of
the whole amount.
In the 37th
proposition
of the first book of
Euclid it is
proved
that all
triangles upon
the
224 The
Theory of
Political
Economy.
same base and between the same
parallels
are
equal
in area. Hence we
may
draw the con-
clusion
that,
provided capital
be invested and
uninvested
continuously
and
proportionally
to
the
time,
we need
only regard
the
greatest
amount invested and the
greatest
time of in-
vestment. Whether
it be all invested
suddenly,
and then
gradually
withdrawn
;
or
gradually
invested and
suddenly
withdrawn
;
or
gradually
invested and
gradually
withdrawn
;/the
amount
of investment will be in
every
case the
greatest
amount of
capital multiplied by
half the time
elapsing
from the
beginning
to the
complete
end
of the investment. 1
Expression for
Amount
of
Investment.
To render our notions of the
subject
still
more exact and
general,
let us resort to mathe-
matical
symbols.
Let
p=
amount of
capital supposed
to be
invested
instantaneously
at
any
moment;
let
t= time
elapsing
before its result is
enjoyed,
also
supposed
to be instantaneous. Then
p
x t
is the amount of investment
;
and if the invest-
ment is
repeated,
the sum of the
quantities
of
the nature of
p
x
t, or",
in the
customary
mode
of
expression, *2pt
is the total amount of invest-
Theory of Capital.
225
merit. But it will seldom be
possible
to
assign
each
portion
of result to an
exactly correspond-
ing portion
of the labour. Cotton
goods
are
due to the
aggregate industry
of those who
tilled the
ground, grew
the
cotton,
plucked,
transported,
cleaned,
spun,
wove,
and
dyed
it;
we cannot
distinguish
the moment when each
labourer's work is
separately repaid.
To avoid
this
difficulty,
we must fix on some moment of
time when the whole transaction is
closed,
all
labour
upon
the
ground repaid,
the mill and
machinery
worn out and
sold,
and the cotton
goods
consumed. Let t now denote the time
elapsing
from
any
moment
up
to this final mo-
ment of
closing
the accounts. Let
p
be as
before
quantities
of
capital
invested,
^ind
let
q
be
quantities
of
capital
uninvested
by
the sale
of the
products
and their
enjoyment by
the
1
consumer.
/Thus
it will be
pretty
obvious that
the sum of the
quantities
p
x
t,
less
by
the sum
of the
quantities q
x
t,
will be the total invest-
ment of
capital,
or in
symbols
Effect of
the Duration
of
Work.
Perhaps
the most
interesting point
in the
Theory
of
Capital
is the
advantage arising
from
the
rapid performance
of
work,
if it is
capable
Q
226 The
Theory of
Political
Economy.
of
being
done with convenience and with the
same ultimate result. To
investigate
this
point,
suppose
that w
=
the whole amount of
wages
which it is
requisite
to
pay
in
building
a
house,
and that this does not alter when we
vary,
within certain
limits,
the time
employed
in the
work,
denoted
by
t. If the work
goes
on con-
tinuously,
we
shall,
during
each unit of
time,
w
have an amount invested
=
-
. The whole
6
amount of investment of
capital
will therefore
be
represented by
the area of a
triangle
whose
base is t and
height
w;
that
is,
the investment
IV
is t x -= . ! Thus when the whole
expenditure
is
ultimately
the
same,
the amount of invest-
ment is
simply proportional
to the time. The
result would be more serious if
compound
in-
terest
during
the time were taken into account
;
but the consideration of
compound
or even
simple
interest would render the formulae
very
complex,
and is
hardly requisite
for the
pur-
poses
I have in view.
We must
clearly distinguish
the case treated
[
above,
in which the amount of labour is the
I
same,
but
spread
over a
longer
time,
from other
Wses where the labour increases in
proportion
Theory of Capital
227
to the time. The investment of
capital,
then,
,-/
grows
in nn
exceedingly rapid
manner.
Neglect-
f
ing'TKefirst
cost of
tools, materials,
and other
preparations,
let the first
day's
labour cost
a;
during
the second
day
this remains
invested,
and the amount of
capital
a is added
;
on each
following day
a like addition is made. The
amount of
capital
invested is
evidently
At
beginning
of second
day
a,
/
third a +
a,
fourth a
+
a +
a;
^
and so
on. If the work lasts
during
n
+
I
days,
the total amount of investment of
capital
will be
a + 2a + 3a + 4a+ na.
The sum of the series is
which increases
by
a term
involving
the
square
of the time. The
employment
of
capital thus)
grows
in
proportion
to the
triangular
numbers
("
1, 3, 6, 10, 15, 21,
&c.
If we
regard
the investment as
taking place
continuously,
the whole
absorption
of
capital
is
represented by
the area of a
right-angled
triangle
(Fig. XII),
in which ob
lt
b
t
6
2
,
6
2
6
3 ,
&c.
are the successive units of time. The
heights
Q
2
228 The
Theory of
Political
Economy.
W--
of the lines
a^
b
lt
a
z
b
2
represent
the amounts
invested at the ends of the times. The
daily
Fiy'KlI
LI
investment
being
a,
the total amount of in-
n
z
vestment will be a
increasing
as the
square
2
of the time.
Cases of this kind
continually
occur,
as in
sinking
a
deep
mine of which the
requisite
depth
cannot be
previously
known with accu-
racy. Any large
work,
such as a
breakwater,
an
embankment,
the foundations of a
great
bridge,
a
dock,
a
long
tunnel,
the
dredging
of
a
channel,
involves a
problem
of a similar
nature;
for it is seldom known what amount
of labour and
capital
will be
required
;
and if
the work lasts much
longer
than is
expected,
the result is
usually
a financial disaster.
Theory of Capital
229
Illustrations
of
the Investment
of Capital.
The time
during
which
capital
remains in-
vested,
and the circumstances of its investment
or
reproduction,
are
exceedingly
various in dif-
ferent
employments.
If a
person plants
cab-
bages, they
will be
ready
in the course of a few
months,
and the labour of
planting
and
tending
them,
together
with a
part
of the labour of
pre-
paring
and
manuring
the
soil,
yields
its results
with
very
little
delay.
In
planting
a forest
tree, however,
a certain amount of labour is
expended,
and no result obtained until the
lapse
of
30, 40,
or 50
years.
The first cost of
enclosing, preparing,
and
planting
a
plantation
is considerable
;
and
though,
after a
time,
the
loppings
and
thinnings
of the trees
repay
the
cost
of
superintendence
and
repairs, yet
the
absorption
of
capital
is
great,
and we
may
thus
account for the small amount of
planting
which
goes
on. The
aging
of wine is a somewhat
similar case. A certain amount of
labour is
expended
without result for 10 or 20
years,
and the cost of
storage
is incurred
during
the
whole time. To estimate the real cost of the
articles
at~the~T?nd of the
timo,
wo
munt,
in all
230 The
Theory of
Political
Economy.
such
cases,
add
compound
interest,.^and_
this
j grows
in a
rapid
manner. For
every pound
invested at the
commencement,
the
following
is the
growth by
interest,
at five
per
cent,
per
annum :
At commencement .. 1.00
At end of 10
years
1.63
20 2.65
30 ,. .. 4.32
40 7.04
50 11.47
60 18.68
70 30-43
80 49.56
90 80.73
100 131.50
If an annual
charge,
however,
small,
has to
be incurred
(for
instance,
the cost of
jjtorage
and
superintendence),
the cost mounts
up
in a
still
mor^_alarming_i)jaSfier!
TEusTif
the cost
is one
pound per
annum,
the
following
are the
amounts,
with
compound
interest,
invested after
decennial intervals:
At
the end of 10
years
12.58
20 33.07
30 66.44
40 120.80
50
209.35
Theory of Capital.
231
At the end of 60
years
353.58
70 588.53
80 971.23
90 1594.61
100 2610.03
An
interesting example
of the investment of
capital
occurs in the case of
gold
and
silver,
a
large
stock of which is maintained either in
the form of
money,
or
plate
and
jewellery.
Labour is
spent
in the
digging
or
mining
of the
metals,
which is
gradually repaid by
the use
or satisfaction
arising
from the
possession
of
the metals
during
the whole time for which
they
continue in use. Hence the investment of
capi-
tal extends over the
average
duration of the
metals.
Now,
if the stock of
gold requires
one
per
cent, of its amount to maintain it undi-
minished,
it will be
apparent
that each
particle
of
gold
remains in use 100
years
on the aver-
age
;
if
-I-
per
cent is
sufficient,
the
average
duration will be 200
years.
We
may
state the
result thus :
Loss of
Average
duration
gold
or silver of each
particle
annually.
in use.
1
per
cent 100
years
i
200
i
400
A
1000
232 The
Theory of
Political
Economy.
The wear and loss of the
precious
metals in
a civilised
country
is
probably
not more than
-3-^-0-
part annually, including plate, jewellery,
and
money
in the
estimate,
so that the
average
investment will be for 200
years.
It is curious
that,
if we
regard
a
quantity
of
gold
as wear-
ing away annually by
a fixed
percentage
of
what
remains,
the duration of some
part
is
infinite,
and
yet
the
average
duration is finite.
Some of the
gold possessed by
the Romans is
doubtless mixed with what we now
possess;
and some small
part
of it will be handed down
as
long
as the human race continues on the
earth.
Fixed and
Circulating Capital.
Economists have
long
been accustomed to
distinguish capital
into the two
kinds,
fixed
and
circulating. (AdalnNSmith
called that cir-
culating
which
passes^
from hand to
hand,
and
yields
a revenue^
by^being parted
wHE". The
fact of
being frequently exchanged
is, however,
an accidental circumstance which leads to no
results of
importance.
(Ricanfo
altered the use
of the
terms,
applying
the name
circulating
to
that which is
frequently destroyed,
and has to
Theory of Capital.
233
be
reproduced.
He
says unequivocally
d
'In
proportion
as fixed
capital
is less
durable,
it
approaches
to the nature of
circulating capital.
It will be
consumed,
and its value
reproduced
in a shorter
time,
in order to
preserve
the
capi-
tal of the manufacturer/
Accepting
this doc-
trine,
and
carrying
it out to the full
extent,
we
must
say
that no
precise
line
jiajx
^be_jdrawn
between^ thejtwo
kinds^
The difference is one
of amount and
degree.
The duration of
capital
may vary
from a
day
to several hundred
years
;
the most
circulating
is the least durable
;
the
\
most fixed the most durable.
Free and Invested
Capital.
I believe that the clear
explanation
of the
doctrine of
capital requires
the use of a term
free capital,
which has not been hitherto
recog-
nised
by
economists.
By
free
capital
I meai
/the_wages
of
labour,
either in its
transitory
form of
money,
or its real form of food am
other necessaries of
life.^/TKe^Trrdiiiary
sus-'
tenance
requisite
to
support
labourers of all
d
'
On the
Principles
of Political
Economy
and
Taxation,'
chap,
i, 5,
third
edition,
p.
36.
234: The
Theory of
Political
Economy.
ranks when
engaged upon
their work is
really
the true form of
capital.
It is
quite
in
agree-
ment with the
ordinary language
of commercial
men
not
tojsajjhat^
a
fectory,-
or.
dp_ck^or
rail-
WRJ,
or
ship;
in
myMfrt^Jbut
that it
represents
so
much
capital
sunk in the
enterprise.
To invest
capital
is to
spend money,
or the food and
maintenance which
money purchases, upon
the
completion
of some work. The
capital
remains
invested or sunk until the work has returned
profit, equivalent
to the first
cost,
with interest.
Much clearness would result from
making
the
language
of
Economy
more
nearly
coincident
with that of commerce.
Accordingly,/!
would
lot
say
that a
railway
is
fixed capital,.
JiiiL that
'.apitaLAs- fixed
..in
,ti)
-railway.
The
capital
is
lot the
railway,
but the food of those who
made the
railway/
Abundance of free
capital
in a
country
means that there are
copious
stocks of
food,
clothing,
and
every
other article
which
people
insist
upon having
; that,
in
short,
everything
is so
arranged
that abundant sub-
sistence and conveniences of
every
kind are
forthcoming
without the labour of the
country
being
much taxed to
provide
them. It is in
such circumstances
possible
that a
part
of the
labourers of the
country
can be
employed
in
Theory of Capital.
235
A]
works of which the
utility
is
distant,
and
yet
)
no one will feel
any scarcity
in the
present.
Uniformity of
the Rate
of
Interest.
A most
important principle
of this
subject
is,
that
free capital
can be
indifferently
em-
ployed
in
any
branch or kind
of industry.
Free
capital,
as we have
just
seen,
consists of a suit-
able assortment of all kinds of
food,
clothing,
utensils, furniture,
and other articles which a
community requires
for its
ordinary
susten-
ance. Men and families consume much the
same
kind of
commodities,
whatever
may
be
the branch of manufacture or trade
by
which
they
earn a
living.
Hence,
there is
nothing
in
the nature of free
capital
to determine its em-
ployment
in one kind of
industry
rather than
another.
The
very
same
wages,
whether we
regard
the
money wages,
or the real
wages
purchased
with the
money,
will
support
a man
whether he be a
mechanic,
a
weaver,
a coal
miner,
a
carpenter,
a
mason,
or
any
other kind
of labourer.
The
necessary
result
is,
that the rate of
interest for free
capital
will tend to and
closely
attain
uniformity in^
all
employments.
The
236 The
Theory of
Political
Economy.
market for
capital
is like all other markets :
iherejcan
be
but one
price for
one article at one
time. Now the article in
question
is the same
so that its
price
must be the same.
Accordingly,
the rate of
interest,
as is well
known,
when
freed from
considerations of
risk, trouble,
and
other
interfering
causes,
is the same in all
trades;
and
every
trade will
employ
capital
up
to the
point
at which it
just yields
the current
.interest.
If
any
manufacturer or trader em-
ploys
so much
capital
in
supporting
a certain
amount of labour that the return is less than
in other
trades,
he will lose
;
for he
might
have
obtained the current rate
by lending
it to other
traders.
General
Expression for
the Rate
of
Interest.
may
obtain a
general expression
for the
rate of interest
yielded by capital
in
any
em-
ployment provided
we
may suppose
that the
produce
varies for the same amount of
labour,
as some continuous function of the time
elaps-
ing
between the
expenditure
of the labour and
the
enjoyment
of the result. /Let the time in
question
be
t,
and the
produce
for the same
amount of labour
ft,
which
may
be
supposed
Theory of Capital.
237
always
to increase with t. If we now extend the
time to t
+ A
t,
the
produce
will be
f(t
+ A
t),
and
the increment of
produce f(t
+ A
t) ft.
The ratio
which this increment bears to the increment of
investment of
capital
will determine the rate of
interest.
Now,
at the end of the time
t,
we
might
receive the
produce
ft,
and this is the
amount of
capital
which remains invested when
we extend the time
by
A.
Hence the amount
of increased investment of
capital
is
ft
. A
t
;
and,
dividing
the increment of
produce by
this,
we have
*t-t
!
When we reduce the
magnitude
of
A indefi-
nitely,
the limit of the first factor of the above
is the differential coefficient of
ft,
so that we
find the rate of interest to be
represented by
dft
J_
ft
dr
ft ft
'
The interest of
capital
is,
in other
words, thq,
^
rate
of
increase
of
the
produce
divided
by
the
whole
produce
;
but this is a
quantity
which*
must
rapidly approach
to
zero,
unless means
can be found of
continually maintaining
the
rate of increase. Unless a
body
moves with a
most
rapidly increasing speed,
the
space
it
238 The
Theory of
Political
Economy.
moves over in
any
unit of time must ulti-
mately
become inconsiderable
compared
with
the whole
space passed
over from the com-
mencement. There is no reason to
suppose
that
industry, generally speaking,
is
capable
of
returning any
such
vastly increasing produce
from the
greater application
of
capital. Every
new machine or other
great
invention will usu-
ally require
a fixation of
capital
for a certain
average
time,
and
may
be
capable
of
paying
interest
upon
it
;
but when this
average
time
is
reached,
it fails to afford a return to more
prolonged
investments.
To take an
instance,
let us
suppose
that the
produce
of labour in some case is
proportional
to the interval of abstinence
t;
then we have
sayft=a.t.
The differential
coefficient/'^
is
now a
;
and the rate of interest
-7-
or
-
or
;
ft
at t
)r the rate of interest varies
inversely
as the
time of investment.
The
Tendency of Profits
to a Minimum.
It is one of the most favourite doctrines of
Political Economists from the time of Adam
Smith,
that as
society progresses
and
capital
Theory of Capital.
239
accumulates,
the rate of
profit,
or rather the
rate of
interest,
tends to fall. The rate will
always ultimately
sink,
so
low,
they
think,
that
the inducements to further accumulation will
cease. This doctrine is in
striking agreement
with the result of the somewhat abstract ana-
lytical investigation given
above. Our formula
for the rate of interest shows that unless there
,.
be constant
progress
in the
arts,
the rate must
soon sink
towards
zero. There are
sufficient
statistical
facts, too,
to confirm the conclusion
historically.
The
only question
that can arise
is as to the actual cause of this
tendency.
Adam Smith
vaguely
attributed it to the
competition
of
capitalists, saying,
'
The
increase
of stock which raises
wages,
tends to lower
prpfikj
When the stocks of
many
rich mer-
chants are turned into the same
trade,
their
mutual
competition naturally
tends to lower
its
profit
;
and when there is a like increase of
stock in all the different trades carried on in
the same
society,
the same
competition
must
produce
the same effect in all.'
Later economists have entertained different
views.
They
attribute the fall of interest
the rise in the cost of labour. The
produce
of
The
Theory of
Political
Economy.
labour,
they say,
is divided between
capitalists
and
labourers,
and if it is
necessary
to
give
more to
labour,
there must be less left to
capital,
and the rate of
profit
will fall.
I shall
discuss the
validity
of this
theory
in the final
chapter,
and will
only
here
remark,
that it is
not in
agreement
with the view I have ventured
to take of the
origin
of interest. I consider that
interest is determined
by
the
increment
of
pro-
duce which it enables labourers to
obtain,
and
is
altogether independent
of the total return
which he receives to this
labojir.
In
fact,
the
ft
formula
J
-^-
shows that the interest will be
/*
greater
as the whole
produce
ft
is
less,
if the
advantage
of more
capital,
measured
by ft,
re-
mains
unchanged.
In
many ill-governed
coun-
tries,
where the land is
wretchedly
tilled,
the
average produce
is
small,
and
yet
the rate of in-
terest is
high, simply
because the want of
security
prevents
the due
supply
of
capital
: hence more
capital
is
urgently
needed,
and its
price
is
high.
In America and the British Colonies the
pro-
duce is often
high,
and
yet
interest is
high,
as there is not sufficient
capital
accumulated to
meet all the demands. In
England
and other
Theory of Capital.
241
old countries the rate of -interest is
generally
lower because there is an abundance of
capital,
and the
urgent
need of more is not
actually
felt.
I conceive that the returns to
capital
and
labour are
independent
of each other. If the
soil
yields
little,
and
capital
will not make it
-^^*""*~
']'
-M<B^
**
^
"^i^*"
yield
"more,
then both
wages
and interest will
^i^*"* *^^
p>
"
MI
be
low,
if not attracted
away
to more
profitable
employment/
If
the^oil
yields
much,
and
capi-
tal will make it
yield
more,
then both
wages
and interest will be
high
;
if the soil
yields
much,
and
capital
will not make
it/yield
more,
then
wages
will be
high
and /nterest
low,
unless the
capital
finds other investments.
But
the
subject
is much
complicated by
the inter-
ference of rent. When we
speak
of the soil
yielding
much,
we must
distmgui]TH*^
WftftT1
the wliole
yield
and the
final
rate
of yielq.
In
the Western States of America the land
yields
a
large
total,
and all at a
high
final
rate,
so
that the labourer
enjoys
the result. In
Eng-
land there is a
large
total
yield,
but a small
final
yield,
so that the landowner receives a
large
rent and the labourer small
wages.
The
more fertile land
having
here been
long
in cul-
tivation,
the
wages
of the labourer are measured
R
242 The
Theory of
Political
Economy.
by
what he could earn out of the cultivation
of the sterile land which it
only just pays
to
take into cultivation.
The
Advantage of Capital
to
Industry.
We must take
great
care not to confuse the
rate of interest on
capital
with the whole ad-
vantage
which it confers on
industry.
The
rate
of interest
depends
on the
.advantage
of
the last increment of
capital,
and
the advan-
tages
^^f^^^ous^CTemejaiajaay
be
greater
in
almost
any~xajcio7
In
considering
the laws of
utility,
we found that an article
possessing
an
indefinitely great
total
utility,
for instance
corn or
water,
might
have a low final
degree
of
utility,
because our need of it was almost
satisfied;
jetjhe
ratio,
of
^ej^liajig^abwcays
de-
pends upon
the
final,
fnotjfchg_preyio^tttility.
The case is the same with
capital.
Some
capi-
tal
may
be
indispensable
to a
manufacture;
hence the benefit conferred
by
the
capital
is
indefinitely great,
and were there no more
capi-
tal to be
had,
the rate of interest which could
be demanded would be almost unlimited. But
as soon as ever a
larger supply
of
capital
be-
comes
available,
the
prior
benefit of
capital
is
Theory of Capital
243
overlooked. As free
capital
is
always
the same
in
quality,
the second
portion may
be made to
replace
the first if needful : hence
capitalists
can
never exact from labourers the whole ad-
vantage
which then*
capital
confers
they
can
only
exact a rate determined
by
the
advantage
of the last
increment. A lender of
capital
can-
not
say
to a borrower who wants
3,000
'
I
know that
1,000
is
indispensable
to
your
busi-
ness,
and therefore will
charge you
100
per
cent,
interest
upon
it
;
for the second
1,000,
which
is less
necessary,
I will
charge
20
per
cent.
;
and
as
upon
the third
1,000
you
can
only
earn the
common
profit,
I will
only
ask 5
per
cent/ The
answer would
be,
that there are
many people
only earning
5
per
cent, on their
capital
who
would be
glad
to lend at a small advance of
interest
;
and it is a matter of indifference who
is the
lender.
Thjj_geiie_nil
result of the
uniformity
of in-
terest
is,
that the
employers
of
capital always
getdlat
the lowest
prevailing
rate;
they always
borrow the
capital
which is least
necessary
to
others,
and either the labourers
themselves,
or
the
public generally
as
consumers,
gather
all
the excess of
advantage.
To illustrate
this,
let
distances
along
the line
ox,
in
Fig.
XIII,
mark
R 2
244 The
Theory of
Political
Economy.
quantities
of
capital employing
in
any
branch
Of
industry
a fixed number of labourers.
Let
the area of the curve denote the whole
produce
of labour and
capital.
Thus to the
capital,
on,
results a
produce
measured
by
the area of the
curvilinear
figure
between the
upright
lines
oy
and
qn.
But the amount of increased
produce
which would be due to an increment of
capital
would be measured
by
the line
qn,
so that this
will
be/'.
The whole interest of the
capital
will be its
amount, on,
multiplied by
the rate
qn,
or the area of the
rectangle
oq.
The re-
mainder of the
produce,
pqry,
will
belong
to
the labourer. But had less
capital
been avail-
able,
say
not more than
om,
its rate of interest
would have been measured
by pm,
the amount
of interest
by
the
rectangle
op,
while
the
Theory of Capital.
245
labourer must have remained contented with
the smaller
share,
psy.
I will not
say
that the
above
diagram represents
with strict
accuracy
the relations of
capital, produce, wages,
rate of
interest,
and amount of interest
;
but it
may
serve
roughly
to illustrate their relations.
I
see no
way
of
exactly representing th$xtneory
of
capital
in the form of a
diagram
Are Articles in the Consumers' hands
Capital
f
The views of the nature of
capital expressed
in this
chapter generally agree
with those enter-
tained
by
Ricardo and various other economists
;
but there is one
point
in which the
theory
leads
me to a result at variance with the
opinions
of
almost all
writers. I feel
quite
unable to
adopt
*
-i
the
opinion
that the moment
goods /pass
into
the
possession
of the consumer
they
cease
alto-
gether
to have the attributes
of
capital.
This
doctrine descends to us from the time of Adam
Smith,
and has
generally
received the undoubt-
ing
assent of his followers. The
latter, indeed,
have
generally
omitted all notice of such
goods,
treating
them as if no
longer
under the view of
the economist. Adam
Smith,
although
he de-ft
nied the
possessions
of a consumer the name of
^
246
The
Theory of
Political
Economy.
capital,
took care to
enumerate
them
as
part
of
le stock of the
community.
He divides into
x
___
-
three
portions
the
general
stock of a
country,
and while the second and third
portions
are
fixed and
circulating capital,
the first is de-
scribed as follows
6
*
The first is that
portion
which is reserved
for
immediate
consumption,
and of which the
characteristic
is,
that it affords no revenue or
profit.
It consists in the stock of
food, clothes,
householdJurniture,
&c.,
which have heen
pur-
chased
by
their
proper
consumers,
but which
are
jiot
yet entirely
consumed. The whole
stock of mere
dwelling^Eouses,
too,
subsisting
at
any
one time in the
country,
make a
part
of
this first
portion.
The stock that is laid out
in a
house,
if it is to be the
dwelling-house
of
the
proprietor,
ceases from that moment to
serve in the function of a
capital,
or to afford
any
revenue to its owner. A
dwelling-house,
as
such,
contributes
nothing
to the revenue of
its
inhabitant;
and
though
it
is,
no
doubt,
ex-
tremely
useful to
him,
it is as his clothes and
/
household furniture are useful to
him, which,
however,
make a
part
of his
expense,
and not
of his revenue.'
,/
6
'
Wealth of
Nations,'
book ii.
chap.
1.
Theory of Capital.
24=7
Mr.
MacCulloch, indeed,
in his edition of the
*
Wealth of Nations'
(p.
121),
has remarked
upon
this
passage,
that
'
The
capital
laid out in
building
houses for such
persons
is
employed
as
much for the
public advantage
as if it were
vested in the tools or instruments
they
make
use of in their
respective
businesses/
He
ap-
pears,
in
fact,
to
reject
the
doctrine,
and it is
surprising
that economists have
generally
ac-
quiesced
in Adam Smith's
view,
though
it leads
to manifest contradictions. It leads to the ab-
surd
conclusion,
that the
very
same
thing
ful-
filling
the
very
same
purposes
will be
capital/
^
or not
according
to its accidental
ownership.
To
procure good port
wine,
it is
necessary
to
keep
it for a number of
years,
and Adam Smith
would not
deny
that a stock of wine
kept
in the
wine merchant's
possession
for this
purpose
is
capital,
because it
yields
him
revenue^x
7
If a
consumer
buys
it when
new,
and
keeps
it to
improve,
it will not be
capital, although
it is
evident that he
gains
the same
profit
as the
merchant
by buying
it at a lower
price.
If a
coal merchant laYs in a stock of coal when
cheap,
to sell when
dear,
it is
capital
;
but if a
consumer
lays
in a
stock,
it is not.
Adam Smith's views seem to be founded
upon
248 The
Theory of
Political
Economy.
a
notion,
that
capital ought
to
give
an annual
revenue or increase of wealth like a field
yields
a
crop
of corn or
grass. Speaking
of a
dwelling-house,
he
says
:
'
If it is to be let to
a tenant for
rent,
as the house itself can
pro-
duce
nothing,
the tenant must
always pay
the
rent out of some other
revenue,
which he de-
rives either from
labour,
or
stock,
or land.
Though
a
house, therefore,
may yield
a revenue
to its
proprietor,
and
thereby
serve in the func-
tion of a
capital
to
him,
it cannot
yield any
to
the
public,
nor serve in the function of a
capi-
tal to
it,
and the revenue of the whole
body
of
the
people
can never be in the smallest
degree
increased
by
it. Clothes and household furni-
ture,
in the same
manner,
sometimes
yield
a
revenue,
and
thereby
serve
injfre
function of
a__
capital
to
particular persons.
In countries
where
masquerades
are
common,
it is a trade
to let out
masquerade
dresses for a
night. Up-
holsterers
frequently
let furniture
by
the month
or
by
the
year.
Undertakers let the furniture
of funerals
by
the
day
and
by
the week.
Many
people
let furnished houses and
get
a
rent,
not
only
for the use of the
house,
but for that of
the furniture. The
revenue, however,
which
is derived from such
things,
must
always
be
Theory of Capital.
249
ultimately
drawn from some other source of
revenue.'
This notion that
people
live
upon
a kind of
net revenue
flowing
in to them
appears
to be
derived from the old French
economists,
and
plays
no
part
in modern Political
Economy.
Nothing
is more
requisite
than a
dwelling-house,
and if a
person
cannot hire a house at the re-
quired spot,
he must find
capital
to build it. I
think that no economist would refuse to count
among
the fixed
capital
of the
country
that
which is sunk in
dwelling-houses. Capital
is
sunk in
farming
that we
may
have
bread,
in
cotton-mills that we
may
be
clothed,
and
why
not in houses that we
may
be
lodged
? If land
yields
an annual revenue of corn and
wool,
milk, beef,
and other
necessaries,
houses
yield
a revenue of shelter and comfort. The sol
end of all
industry
is to
satisfy
our wants
;
an
if
capital
is
requisite
to
supply
shelter,
and
fur-)
niture and useful
utensils,
as it
undoubtedly
is,
why
refuse it the name which it bears in all
other
employments
?
Can we
deny
that the
property
of a hotel-
keeper
is
capital
and
yields
a revenue to its
owner? Yet it is invested in
pots
and
pans,
and
beds,
and all kinds of common
furniture.
250
The
Theory of
Political
Economy.
In America it is not uncommon for
people
to
live all their lives in hotels or
boarding-houses
;
and we
might readily
conceive the
system
to
advance until no one undertook
housekeeping
except'
as a
profession.
Now if we allow to
what is invested in hotels the nature of
capital,
I do not see how we can refuse it to common
houses. We should thus be led into all kinds
of absurdities. For
instance,
if two
people
live
in their own
houses,
these are
not,
according
to
present opinion, capital
;
if
they
find it conve-
nient to
exchange
houses and
pay
rent each to
the
other,
the houses are
capital.
It is a
regular
trade in
watering places
to furnish houses and
let them :
surely
it is
capital
which is embarked
in the trade. If a
private
individual
happens
to own a furnished house which he does not
at the time
want,
and lets
it,
can we refuse
to
regard
his house and furniture as
capital
?
Whenever one
person provides
the articles and
another uses them and
pays
rent,
there is
capi-
tal.
Surely,
then,
if the same
person
uses and
owns
them,
the
nature of the
things
is
not
fundamentally
different. There is no need for
a
money payment
to
pass
;
but
every person
who
keeps
accurate accounts should debit those
accounts with an annual
charge
for interest and
Theory of Capital.
251
depreciation
on what he has invested in
house
and furniture.
Housekeeping
is an
occupation
involving wages, capital
and
interest,
like
any
other
business,
except
that the owner con-
sumes the whole result.
By accepting
this view of the
subject,
we
shall avoid endless difficulties.
What,
for in-
stance,
shall we
say
to a theatre? Is it not
the
product
of
capital
? Can it be erected
without
capital
? Does it not return
interest,
if
successful,
like
any
cotton
mill,
or steam
vessel? If the economist
agrees
to
this,
he
must
allow,
on similar
grounds,
that a
very
large part
of the
aggregate capital
of the
country
is invested in
theatres, hotels, schools,
lecture
rooms,
and institutions of various kinds
which do not
belong
to the
industry
of the
country,
taken in a narrow
sense,
but which
none the less contribute to the wants of its
inhabitants,
which is the sole
object
of all
industry.
I
may add,
that even
th^
fnod
r *1*thftff,
and
many
other
possessions
of extensive classes are
often
capital
because
they
are
bought
upon
credit,
and interest is
undoubtedly paid
for the
capital
sunk in them
by
the dealers. There is
hardly,
I
suppose,
a man of fashion in London
252
The
Theory of
Political
Economy.
who walks in his own
clothes,
and the tailors
find in the
practice
a
very profitable
invest-
ment for
capital. Except among
the
poorer
classes,
and often
among
them,
food is never
paid
for until some time after it is consumed.
Interest must be
paid
one
way
or another
upon
the
capital
thus absorbed.
Whether or not these articles in the con-
sumers' hands are
capital,
at
any
rate
they
have
capital
invested in them that
is,
labour
has been
spent upon
them of which the whole
benefit is not
enjoyed
at once.
I
might
also
point
out at almost indefinite
length,
that the stock of
food,
clothing,
and
other
requisite
articles of subsistence in the
country
are what
compose
a main element of
capital according
to the statements of Mr.
Mill,
Professor
Fawcett,
and most other economists.
Now what does it
really
matter if these arti-
es
happen
to lie in the warehouses of traders
or
""
in
private
houses,
so
long
as there is a
stock? At
present
it is the
practice
for farm-
ers or corn merchants to hold the
produce
of the harvest until the
public buys
and con-
sumes it.
Surely
the stock of corn is
capital
?
But if it were the
practice
of
every
house-
keeper
to
buy up
corn in the autumn and
keep
cles
/7or~~
jf
stc
Theory of Capital.
253
it in a
private granary,
would it not serve in
exactly
the same
way
to subsist the
popu-
lation? Would not
everything go
on
exactly
the
same,
except
that
every
one would be his
own
capitalist
in
regard
to corn in
place
of
paying
farmers and corn merchants for
doing
the business?
CHAPTER VIII.
CONCLUDING REMARKS.
The Doctrine
of Population.
IT is no
part
of
my object
in this work to
attempt
to trace
out,
with
any approach
to
completeness,
the results of the
theory given
in the
preceding chapters.
When the views of
the nature of
Value,
and the
general
method
of
treating
the
subject by
the
application
of the
fluxional
calculus,
have received some
recogni-
tion and
acceptance,
it will be time
enough
to
think of results. I shall
only
further
occupy
a few
pages
in
pointing
out the branches of
economical doctrine which have been
omitted,
and
indicating
their connection with the
theory.
The doctrine of
population
has been
conspicu-
ously
absent,
not because I in the least doubt
its truth and vast
importance,
but because it
Concluding
Remarks.
255
forms no
part
of the direct
problem
of
Economy.
I do not at the moment remember to have seen
it remarked
by any
writer,
that it is a total
inversion of the
problem
to treat labour as a
varying quantity,
when we
originally
start with
labour as the first element of
production,
and
aim at the most economical
employment
of that
labour. The
great problem
of
Economy may,
as it seems to
me,
be stated thus :
Given,
a
certain
population,
with' various needs and
powers
ofproduction,
in
possession of
certain lands and
other sources
of
material :
required,
the mode
of
employing
their labour so as to maximise the
utility of
the
produce.
It is what mathema-
ticians would call a
change
of the
variable,
afterwards to treat that
labour,
which is first
a fixed
quantity,
as variable. It
really
amounts
to
altering
the conditions of the
problem
so as
to create at each variation a new
problem.
The same
results, too,
would
generally
be ob-
tained
by supposing
the other conditions to
vary.
Given,
a certain
population,
we
may
imagine
the land and
capital
at their
disposal
to be
greater
or
less,
and
may
then trace out
the results which
will,
in most
respects,
be
applicable
to a less or
greater population
with
the
original
land and
capital.
256
The
Theory of
Political
Economy.
The Relation
of Wages
and
Profit.
There is another inversion of the
problem
of
Economy
which is
generally
made in works
upon
the
subject. Although
labour is the start-
ing-point
in
production,
and the interests of the
labourers the
very object
of the
science,
yet
economists do not
progress
far before
they
suddenly
turn round and treat labour as a
commodity
which is
bought up by capitalists.
Labour becomes itself the
object
of the laws of
supply
and
demand,
instead of those laws act-
ing
in the distribution of the
products
of labour.
Political Economists have
invented, too,
a
very
simple
theory
to determine the rate of
wages
at which
capital
can
buy up
labour. The aver-
age
rate of
wages, they say,
is found
by
dividing
the whole amount of
capital appropriated
to the
payment
of
wages by
the number of the labour-
ers
paid
;
and
they
wish us to believe that this
settles the
question.
But a
very
little consider-
ation will show that this
proposition
is
simply
a truism. The
average
rate of
wages
must be
equal
to what is
appropriated
to the
purpose
divided
by
the number who share it. The whole
question
will consist in
determining
how much
is
appropriated
for the
purpose
;
for it
certainly
Concluding
Remarks.
257
.
need not be the whole
existing
amount of cir-
culating capital.
Mr. Mill
distinctly says,
that
because
industry
is limited
by capital,
we are
not to infer that it
always
reaches that limit
a
;
and,
as a matter of
fact,
we often observe that
there is abundance of
capital
to be had at low
rates of
interest,
while there are also
large
numbers of artisans
starving
for want of em-
ployment.
The
wage-fund theory
is therefore
wholly illusory
as a real solution of the
pro-
blem,
though
I do not
deny
that it
may
have a
certain limited and truthful
application,
to be
shortly
considered.
Another
part
of the current doctrines of Eco-
nomy
determines the rate of
profit
of
capitalists
in a
very simple
manner. The whole
product
of
industry
must be divided into the
portions
paid
as
rent, taxes,
profits,
and
wages.
We
may
exclude taxes as
exceptional,
and not
very
im-
portant.
Kent also
may
be
eliminated,
for it is
essentially
variable,
and is reduced to zero in
the case of the
poorest
land cultivated. We
thus arrive at the
simple equation
Produce
=
profit
+
wages.
A
very simple
result also is drawn from the
a
'
Principles
of Political
Economy,'
book i.
chap.
5,
2.
258 The
Theory of
Political
Economy.
formula
;
for we are told that if
wages
rise,
profits
must
fall,
and vice versd.
But such a
doctrine is
radically
fallacious
;
it involves the
attempt
to determine two unkown
quantities from
one
equation.
I
grant
that if the
produce
be a
fixed
amount,
then if
wages
rise
profits
must
fall,
and vice versd.
Something might perhaps
be made of this doctrine if Ricardo's
theory
of
a natural rate of
wages,
that which is
just
suf-
ficient to
support
the
labourer,
held true. But
I
altogether question
the existence of
any
such
rate. The
wages
of
working
men in this
king-
dom
vary
from
perhaps
ten
shillings
a week
up
to
forty shillings
or
more,
the minimum in one
part
of the
country
is not the minimum in
another. It is
utterly impossible,
too,
to define
exactly
what are the necessaries of life. I am
inclined, therefore,
altogether
to
reject
the cur-
rent doctrines as to the rate of
wages
;
and
even if the
theory
held true of
any
one class
of
labourers,
there is the additional
difficulty
that we have to account for the
very
different
rates which
prevail
in different trades. It is
quite impossible
that we should
accept
for ever
Ricardo's
sweeping simplification
of the
subject
involved in the
assumption,
that there is a
natural
ordinary
rate of
wages
for common
Concluding
Remarks.
259
labour,
and that all
higher
rates are
merely
exceptional
instances,
to be
explained
away
on
other
grounds.
The view which I should hold of the rate of
wages
is not more difficult to
comprehend
than
the current one. It
is,
that the
wages
of a
working
man are
ultimately
coincident with
what he
produces,
after the deduction of
rent,
taxes,
and the interest of
capital.
I think that
in the
equation
Produce
=
profit
+
wages,
the
quantity
of
produce
is
essentially
variable,
and that
profit
is the
part
to be first deter-
mined. If we resolve
profit
into
wages
of
super-
intendence,
insurance
against
risk,
and
interest,
the first
part
is
really wages
itself;
the second
equalises
the result in different
employments
;
and the interest
is,
I
believe,
determined as
stated in the last
chapter.
The reader will observe the
important quali-
fication,
that
wages
are
only ultimately
thus
determined that
is,
in the
long
run,
and on the
average
of
any
one branch of
employment.
The fact that workmen are not their own
capitalists
introduces
complexity
into the
pro-
blem. The
capitalists,
or
entrepreneurs,
enter
as a distinct interest. It is
they
who
project
s 2
260 The
Theory of
Political
Economy.
and
manage
a branch of
production,
and form
estimates as to the
expected produce.
It is
the amount of this
produce
which incites them
to invest
capital
and
huy up
labour.
They pay
the lowest current rates for the kind of labour
required
;
and if the
produce
exceeds the aver-
age,
those who are first in the field make
large
profits.
This soon induces
competition
on the
part
of other
capitalists,
who,
in
trying
to obtain
good
workmen,
will raise the rate of
wages.
This
competition
will
proceed
until the
point
is
reached at which
only
the
regular
market rate
of interest is obtained for the
capital
invested.
At the same time
wages
will have been so
raised,
that the workmen
reap
the whole excess
of
produce,
unless indeed the
price
of the
pro-
duce has
fallen,
and the
public,
as
consumers,
have the benefit. Whether this latter result
will follow or
not,
depends upon
the number
of labourers who are fitted for the work. Where
much skill and education is
required,
extensive
competition
will be
impossible,
and a
perma-
nently high
rate of
wages
will exist. But if
only
common labour is
requisite,
the
price
of
the
goods
cannot be
maintained,
wages
will fall
to their former
point,
and the
public
have the
advantage
of
cheaper supplies.
Concluding
Remarks. 261
It will be
observed,
that this account of the
matter involves the
temporary application
of
the
wage-fund theory.
It is the
proper
func-
tion of
capitalists
to sustain labour before the
result is
accomplished,
and as
many
branches
of
industry require
a
large outlay long previous
to
any
definitive result
being
arrived
at,
it fol-
lows that
capitalists
must undertake the risk of
any
branch of
industry
where the ultimate
pro-
fits are not accuratelv known. But we now have
/
some clue as to the amount of
capital
which
will be
appropriated
to the
payment
of
wages
in
any
trade. The amount of
capital
will de-
pend
on the amount of
anticipated profits,
and
the
competition
to obtain
proper
workmen will
strongly
tend to secure to the latter all their
legitimate
share in the ultimate
produce.
For
instance,
let a number of schemes be set on
foot for
laying telegraphic
cables. The ulti-
mate
profits
are
very
uncertain,
depending upon
the
utility
of the cables as
compared
with their
cost. If
capitalists
make a
large
estimate of
those
profits, they
will
apply
much
capital
to
the immediate manufacture of the cables. All
workmen
competent
at the moment to be em-
ployed
will be
hired,
and
high wages paid
if
necessary. Every
man who has
peculiar
skill,
262 The
Theory of
Political
Economy.
knowledge,
or
experience, rendering
his assist-
ance
valuable,
will be hired at
any requisite
cost. At this
point
it is the
wage-fund theory
that is in
operation.
But,
after a certain num-
ber of
years,
the condition of affairs will be
totally
different.
Capitalists
will
learn,
by
ex-
perience, exactly
what the
profits
of cables
may
be
;
that amount of
capital
will be thrown into
the work which finds the
average
amount of
profits,
and neither more nor less. The cost of
transmitting messages
will be reduced
by
com-
petition,
so that no excessive
profits
are made
by any
of the
parties
concerned
;
the rate of
wages,
therefore,
of
every species
of labour will
be reduced to the
average proper
to labour of
that
degree
of skill. But if there be
required
in
any
branch of the work a
very special
kind
of skilled and
experienced
labour,
it will not
be affected
by competition
in the same
way,
and the
wages
or
salary
will remain
high.
I think that it is in this
way quite possible
to reconcile theories which are at first
sight
so different. The
wage-fund theory
acts in
a
wholly temporary
manner.
Every
labourer
ultimately
receives the due value of his
pro-
duce after
paying
a
proper
fraction to the
capitalist.
At the same time workers of dif-
Concluding
Remarks.
263
ferent
degrees
of
skill,
receive
very
different
shares
according
as
they
contribute a common
or a scarce kind of labour to the result.
Professor
Hearris Views.
I have the more
pleasure
and confidence in
putting
forward these somewhat heretical views
concerning
the
general problem
of
Economy,
inasmuch as
they
are
nearly
identical with
those arrived at
by
Professor
Hearn,
of Mel-
bourne
University.
It would be a somewhat
long
task to trace out
exactly
the coincidence
of
opinions
between
us,
but he
certainly adopts
the notion that the
capitalist merely buys up
temporarily
the
prospects
of the concern he
manages
and the labourers he
employs.
Thus
he
says
'
In
place
of
having
a share in the
undertaking,
the
co-operator
sells for a
stipu-
lated
price
his labour or the use of his
capital.
The case therefore comes within the
ordinary
conditions of
exchange
;
arid the
price
of labour
and the
price
of
capital
are determined in the
same manner as all other
questions
of
price
are
determined. Yet the
general
character of the
partnership
is not
destroyed. Although
each
particular
transaction amounts to a
sale,
yet
for the continuance of the business a nearer
264 The
Theory of
Political
Economy.
connection arises.
Although
the whole loss of
the
undertaking,
if the
undertaking
be unfor-
tunate,
falls
upon
the last
proprietor,
and the
interests of the other
parties
have been
pre-
viously
secured,
yet
each such loss
prevents
a
repetition
of the transaction from which it
arose. The
capital
which
ought
to have been
replaced,
and
which,
if
replaced,
would have
afforded the means of
employing
labour and of
defraying
the interest
upon
other
capital,
has
disappeared;
and thus the market for labour
and for
capital
is
by
so much diminished. Both
the labourer and the intermediate
capitalist
are
therefore
directly
concerned in the success of
every enterprise
towards which
they
have con-
tributed. If it be
successful,
they
feel the ad-
vantage
;
if it be not
successful,
they
feel in
like manner the loss. But this
community
of
interest is no
longer
direct,
but is indirect
merely
;
and it arises not from the
gains
or the
losses of
partners,
but from the increased
utility,
or the diminished demands of customers/
This
passage really
contains a statement of
the views which I am inclined
wholly
to ac-
cept
;
but no
passages
which I can select will
convey
a true notion of the
enlightened
view
which
Professor Hearn takes of the industrial
Concluding
Remarks.
265
structure of
society
in his admirable
work,
'
Plutology.'
b
I know not what accidental cir-
cumstance,
the distant residence of the
author,
or the unfortunate selection of a
title,
for in-
stance,
has diverted attention from the
singular
excellence and
independence
of his work.
The Noxious
Influence of
Authority.
I have but a few lines more to add. I have
ventured in the
preceding pages
to call in
ques-
tion not a few of the favourite doctrines of
economists. To me it is far more
pleasant
to
agree
than to differ
;
but it is
impossible
that
he who has
any regard
for truth can
long
avoid
protesting against
doctrines which seem to him
erroneous. There is ever a
tendency
of a most
hurtful kind to allow
opinions
to
crystallise
into creeds.
Especially
does this
tendency
mani-
fest itself when some eminent
author,
with the
power
of clear and
comprehensive exposition,
becomes
recognised
as an
authority
on the sub-
ject.
His works
may possibly
be far the best
which are extant
;
they may
combine more
truth with less error than we can elsewhere
find. But
any
man must
err,
and the best
b
Macmillau and
Co.,
London.
T
266 The
Tlieory of
Political
Economy.
works should ever be
open
to criticism.
If,
instead of
welcoming inquiry
and
criticism,
the
admirers of a
great
author
accept
his
writings
as
authoritative,
hoth in their excellences and
defects,
the most serious
injury
is done to
truth. In matters of
philosophy
and science
authority
has ever been the
great opponent
of truth. A
despotic
calm is the
triumph
of
error
;
in the
republic
of the sciences sedition
and even
anarchy
are commendable.
In the
physical
sciences
authority
has
greatly
lost its noxious influence.
Chemistry,
in its
brief existence of a
century,
has
undergone
three or four
complete
revolutions of
theory.
In the science of
light,
Newton's own
authority
has been
decisively
set
aside,
after it had re-
tarded for
nearly
a
century
the
progress
of in-
quiry.
Astronomers have not
hesitated,
within
the last few
years,
to alter their estimate of all
the dimensions of the
planetary system
and the
universe,
because
good
reasons had been shown
for
calling
in
question
the real coincidence of
previous
measurements.
In science and
philo-
sophy nothing
must be held sacred. Truth
itself is indeed
sacred,
but where is the absolute
criterion of truth ?
I have added these words because
I think
Concluding
Remarks.
267
there is some fear of the too
great
influence of
authoritative writers in Political
Economy.
I
protest against
deference for
any
man
being
allowed to check
inquiry.
Our science is be-
coming
far too much a
stagnant
one,
in which
opinions
rather than
experience
and reason are
appealed
to.
There are valuable
suggestions
towards the
improvement
of the science contained in the
works of such writers as
Senior, Banfield,
Cairnes,
Jennings,
and
Hearn,
not to mention
such
original foreign
authors as Courcelle-Se-
neuil or Bastiat
;
but
they
are
neglected
be-
cause
they
do not
happen
to have been
adopted
in more
widely-studied
works. Under these
circumstances it is a
positive
service to break
the monotonous
repetition
of current
question-
able
doctrines,
even at the risk of new error. I
trust that the
theory
now
given may prove
ac-
curate; but,
however this
may
be,
it will not
be useless if it cause
inquiry
to be
directed
into the true basis and form of a science which
touches so
directly
the material welfare of the
human race.
FINIS.
to
-
T
Jevons,
William
Stanley
The
theory
of
political'
J57
economy
1871
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