I. RICARDO’S STARTING-POINT

David Ricardo, born 19th April 1772, was the son of a Dutch Jew who had settled in England, and made money upon the Stock Exchange.  Ricardo had a desultory education, and was employed in business from his boyhood.  He abandoned his father’s creed, and married an Englishwoman soon after reaching his majority.  He set up for himself in business, and, at a time when financial transactions upon an unprecedented scale were giving great opportunities for speculators, he made a large fortune, and about 1814 bought an estate at Gatcombe Park, Gloucestershire.  He withdrew soon afterwards from business, and in 1819 became member of parliament.  His death on 11th September 1823 cut short a political career from which his perhaps too sanguine friends anticipated great results.  His influence in his own department of inquiry had been, meanwhile, of the greatest importance.  He had shown in his youth some inclination for scientific pursuits; he established a laboratory, and became a member of scientific societies.  The perusal of Adam Smith’s Wealth of Nations in 1799 gave him an interest in the application of scientific methods to the questions with which he was most conversant.  Accepting Adam Smith as the leading authority, he proceeded to think out for himself certain doctrines, which appeared to him to have been insufficiently recognised by his teacher.  The first result of his speculations was a pamphlet published in 1809 upon the depreciation of the currency.  Upon that topic he spoke as an expert, and his main doctrines were accepted by the famous Bullion Committee.  Ricardo thus became a recognised authority on one great set of problems of the highest immediate interest.  Malthus’s Inquiry into Rent suggested another pamphlet; and in 1817, encouraged by the warm pressure of his friend, James Mill, he published his chief book, the Principles of Political Economy and Taxation.  This became the economic Bible of the Utilitarians.  The task of a commentator or interpreter is, for various reasons, a difficult one.

There is a certain analogy between Ricardo and a very different writer, Bishop Butler.  Each of them produced a great effect by a short treatise, and in each case the book owed very little to the ordinary literary graces.  Ricardo’s want of literary training, or his natural difficulty of utterance, made his style still worse than Butler’s; but, like Butler, he commands our respect by his obvious sincerity and earnestness.  He is content when he has so expressed his argument that it can be seized by an attentive reader.  He is incapable of, or indifferent to, clear and orderly exposition of principles.  The logic is there, if you will take the trouble to look for it.  Perhaps we ought to be flattered by this tacit reliance upon our patience.  ‘You,’ Ricardo, like Butler, seems to say to us, ’are anxious for truth:  you do not care for ornament, and may be trusted to work out the full application of my principles.’  In another respect the two are alike.  Butler’s argument has impressed many readers as a demolition of his own case.  It provokes revolt instead of adhesion.  Ricardo, an orthodox economist, laid down principles which were adopted by Socialists to upset his own assumptions.  Such a God as you worship, said Butler’s opponents, is an unjust being, and therefore worse than no God.  Such a system as you describe, said Ricardo’s opponents, is an embodiment of injustice, and therefore to be radically destroyed.  Admitting the logic, the argument may be read as a reductio ad absurdum in both cases.

Ricardo has involved himself in certain special difficulties.  In the first place, he presupposes familiarity with Adam Smith.  The Principles is a running comment upon some of Smith’s theories, and no attempt is made to reduce them to systematic order.  He starts by laying down propositions, the proof of which comes afterwards, and is then rather intimated than expressly given.  He adopts the terminology which Smith had accepted from popular use, and often applies it in a special significance, which is at least liable to be misunderstood by his readers, or forgotten by himself.  It is difficult, again, to feel sure whether some of his statements are to be taken as positive assertions of fact, or merely as convenient assumptions for the purposes of his argument.  Ricardo himself, as appears in his letters, was painfully aware of his own awkwardness of expression, and upon that point alone all his critics seem to be in tolerable agreement.  Happily, it will be enough for my purpose if I can lay down his essential premises without following him to the remoter deductions.

Ricardo’s pamphlet upon Malthus (1815) gives a starting-point.  Ricardo cordially adopts Malthus’s theory of rent, but declares that it is fatal to some of Malthus’s conclusions.  Malthus, we have seen, wished to regard rent as in some sense a gift of Providence a positive blessing due to the fertility of the soil.  Ricardo maintains, on the contrary, that ’the interest of the landlord is necessarily opposed to the interest of every other class in the community.’ The landlord is prosperous when corn is scarce and dear; all other persons when it is plentiful and cheap.  This follows upon Malthus’s own showing.  As men are forced to have recourse to inferior soils, the landlord obtains a larger share of the whole produce; and, moreover, since corn also becomes more valuable, will have a larger share of a more valuable product.  The question apparently in dispute whether we should be glad that some land is better than the worst, or sorry because all is not equal to the best seems rather idle.  The real question, however, is whether rent, being a blessing, should be kept up by protection, or, being a curse, should be brought down by competition?  What is the real working of the system?  Set the trade free, says Ricardo, and the capital will be withdrawn from the poor land and employed upon manufactures, to be exchanged for the corn of other countries. The change must correspond to a more advantageous distribution of capital, or it would not be adopted.  The principle involved in this last proposition is, he adds, one of the ’best established in the science of political economy, and by no one is more readily admitted than by Mr. Malthus.’  To enforce protection would be, on Malthus’s illustration, to compel us to use the ’worst machines, when, at a less expense, we could hire the very best from our neighbours.’ Briefly, then, the landlord’s interest is opposed to the national interest, because it enforces a worse distribution of capital.  He compels us to get corn from his worst land, instead of getting it indirectly, but in greater quantity, from our spinning-jennies.

For Ricardo, as for Malthus, the ultimate driving force is the pressure of population.  The mass of mankind is always struggling to obtain food, and is able to multiply so rapidly as to exhaust any conceivable increase of supplies.  The landlord class alone profits.  The greater the struggle for supply the greater will be the share of the whole produce which must be surrendered to it.  Beyond this, however, lies the further problem which specially occupied Ricardo.  How will the resulting strain affect the relations of the two remaining classes, the labourers and the capitalists?  The ultimate evil of protection is the bad distribution of capital.  But capital always acts by employing labour.  The farmer’s capital does not act by itself, but by enabling his men to work.  Hence, to understand the working of the industrial machinery, we have to settle the relation of wages and profits.  Ricardo states this emphatically in his preface.  Rent, profit, and wages, he says, represent the three parts into which the whole produce of the earth is divided.  ’To determine the laws which regulate this distribution is the principal problem in political economy’; and one, he adds, which has been left in obscurity by previous writers. His investigations are especially directed by the purpose thus defined.  He was the first writer who fairly brought under distinct consideration what he held, with reason, to be the most important branch of economical inquiry.

There was clearly a gap in the economic doctrine represented by the Wealth of Nations.  Adam Smith was primarily concerned with the theory of the ‘market.’  He assumes the existence of the social arrangement which is indicated by that phrase.  The market implies a constitution of industrial agencies such that, within it, only one price is possible for a given commodity, or, rather, such that a difference of price cannot be permanent.  According to the accepted illustration, the sea is not absolutely level, but it is always tending to a level. A permanent elevation at one point is impossible.  The agency by which this levelling or equilibrating process is carried out is competition, involving what Smith called the ‘higgling of the market.’  The momentary fluctuation, again, supposes the action of ‘supply and demand,’ which, as they vary, raise and depress prices.  To illustrate the working of this machinery, to show how previous writers had been content to notice a particular change without following out the collateral results, and had thus been led into fallacies such as that of the ‘mercantile system,’ was Smith’s primary task.

Beyond or beneath these questions lie difficulties, which Smith, though not blind to their existence, treated in a vacillating and inconsistent fashion.  Variations of supply and demand cause fluctuations in the price; but what finally determines the point to which the fluctuating prices must gravitate?  We follow the process by which one wave propagates another; but there is still the question, What ultimately fixes the normal level?  Upon this point Ricardo could find no definite statement in his teacher.  ‘Supply and demand’ was a sacred phrase which would always give a verbal answer, or indicate the immediate cause of variations on the surface.  Beneath the surface there must be certain forces at work which settle why a quarter of corn ‘gravitates’ to a certain price; why the landlord can get just so many quarters of corn for the use of his fields; and why the produce, which is due jointly to the labourer and the farmer, is divided in a certain fixed proportion.  To settle such points it is necessary to answer the problem of distribution, for the play of the industrial forces is directed by the constitution of the classes which co-operate in the result.  Ricardo saw in Malthus’s doctrines of rent and of population a new mode of approaching the problem.  What was wanted, in the first place, was to systematise the logic adopted by his predecessors.  Rent, it was clear, could not be both a cause and an effect of price, though at different points of his treatise Smith had apparently accepted each view of the relation.  We must first settle which is cause and which effect; and then bring our whole system into the corresponding order.  For the facts, Ricardo is content to trust mainly to others.  The true title of his work should be that which his commentator, De Quincey, afterwards adopted, the Logic of Political Economy.  This aim gives a partial explanation of the characteristic for which Ricardo is most generally criticised.  He is accused of being abstract in the sense of neglecting facts.  He does not deny the charge.  ’If I am too theoretical (which I really believe to be the case) you,’ he says to Malthus, ’I think, are too practical.’ If Malthus is more guided than Ricardo by a reference to facts, he has of course an advantage.  But so far as Malthus or Adam Smith theorised and, of course, their statement of facts involved a theory they were at least bound to be consistent.  It is one thing to recognise the existence of facts which your theory will not explain, and to admit that it therefore requires modification.  It is quite another thing to explain each set of facts in turn by theories which contradict each other.  That is not to be historical but to be muddleheaded.  Malthus and Smith, as it seemed to Ricardo, had occasionally given explanations which, when set side by side, destroyed each other.  He was therefore clearly justified in the attempt to exhibit these logical inconsistencies and to supply a theory which should be in harmony with itself.  He was so far neither more nor less ‘theoretical’ than his predecessors, but simply more impressed by the necessity of having at least a consistent theory.

There was never a time at which logic in such matters was more wanted, or its importance more completely disregarded.  Rash and ignorant theorists were plunging into intricate problems and propounding abstract solutions.  The enormous taxation made necessary by the war suggested at every point questions as to the true incidence of the taxes.  Who really gained or suffered by the protection of corn?  Were the landlords, the farmers, or the labourers directly interested?  Could they shift the burthen upon other shoulders or not?  What, again, it was of the highest importance to know, was the true ‘incidence’ of tithes, of a land-tax, of the poor-laws, of an income-tax, and of all the multitudinous indirect taxes from which the national income was derived?  The most varying views were held and eagerly defended.  Who really paid?  That question interested everybody, and occupies a large part of Ricardo’s book.  The popular answers involved innumerable inconsistencies, and were supported by arguments which only required to be confronted in order to be confuted.  Ricardo’s aim was to substitute a clear and consistent theory for this tangle of perplexed sophistry.  In that sense his aim was in the highest degree ‘practical,’ although he left to others the detailed application of his doctrines to the actual facts of the day.

II.  THE DISTRIBUTION PROBLEM

The rent doctrine gives one essential datum.  A clear comprehension of rent is, as he was persuaded, ’of the utmost importance to political economy.’ The importance is that it enables him to separate one of the primary sources of revenue from the others.  It is as though, in the familiar illustration, we were considering the conditions of equilibrium of a fluid; and we now see that one part may be considered as a mere overflow, resulting from (not determining) the other conditions.  The primary assumption in the case of the market is the level of price.  When we clearly distinguish rent on one side from profits and wages on the other, we see that we may also assume a level of profits.  There cannot, as Ricardo constantly says, ’be two rates of profit,’ that is, at the same time and in the same country.  But so long as rent was lumped with other sources of revenue it was impossible to see, what Malthus and West had now made clear, that in agriculture, as in manufactures, the profits of the producer must conform to the principle.  Given their theory, it follows that the power of land to yield a great revenue does not imply a varying rate of profit or a special bounty of nature bestowed upon agriculture.  It means simply that, since the corn from the good and bad land sells at the same price, there is a surplus on the good.  But as that surplus constitutes rent, the farmer’s rate of profit will still be uniform.  Thus we have got rid of one complication, and we are left with a comparatively simple issue.  We have to consider the problem, What determines the distribution as between the capitalist and the labourer?  That is the vital question for Ricardo.

Ricardo’s theory, in the first place, is a modification of Adam Smith’s.  He accepts Smith’s statement that wages are determined by the ‘supply and demand of labourers,’ and by the ’price of commodities on which their wages are expended.’ The appeal to ’supply and demand’ implies that the rate of wages depends upon unchangeable economic conditions.  He endorses Malthus’s statement about the absurdity of considering ‘wages’ as something which may be fixed by his Majesty’s ‘Justices of the Peace,’ and infers with Malthus that wages should be left to find their ‘natural level.’  But what precisely is this ‘natural level?’ If the Justice of the Peace cannot fix the rate of wages, what does fix them?  Supply and demand?  What, then, is precisely meant in this case by the supply and demand?  The ‘supply’ of labour, we may suppose, is fixed by the actual labouring population at a given time.  The ‘demand,’ again, is in some way clearly related to ‘capital.’  As Smith again had said, the demand for labour increases with the ’increase of revenue and “stock,” and cannot possibly increase without it.’  Ricardo agrees that ’population regulates itself by the funds which are to employ it, and therefore always increases or diminishes with the increase or diminution of capital.’ It was indeed a commonplace that the increase of capital was necessary to an increase of population, as it is obvious enough that population must be limited by the means of subsistence accumulated.  Smith, for example, goes on to insist upon this in one of the passages which partly anticipates Malthus. But this does not enable us to separate profit from wages, or solve Ricardo’s problem.  When we speak of supply and demand as determining the price of a commodity, we generally have in mind two distinct though related processes.  One set of people is growing corn, and another working coal mines.  Each industry, therefore, has a separate existence, though each may be partly dependent upon the other.  But this is not true of labour and capital.  They are not products of different countries or processes.  They are inseparable constituents of a single process.  Labour cannot be maintained without capital, nor can capital produce without labour.  Capital, according to Ricardo’s definition, is the ’part of the wealth of a country which is employed in production, and consists of food, clothing, raw materials, machinery, etc., necessary to give effect to labour.’ That part, then, of capital which is applied to the support of the labourer his food, clothing, and so forth is identical with wages.  To say that, if it increases, his wages increase is to be simply tautologous.  If, on the other hand, we include the machinery and raw materials, it becomes difficult to say in what sense ‘capital’ can be taken as a demand for labour.  Ricardo tells Malthus that an accumulation of profit does not, as Malthus had said, necessarily raise wages; and he ultimately decided, much to the scandal of his disciple, M’Culloch, that an increase of ’fixed capital’ or machinery might be actually prejudicial, under certain circumstances, to the labourer.  The belief of the labouring class that machinery often injures them is not, he expressly says, ’founded on prejudice and error, but is conformable to the correct principles of political economy.’ The word ‘capital,’ indeed, was used with a vagueness which covered some of the most besetting fallacies of the whole doctrine.  Ricardo himself sometimes speaks as though he had in mind merely the supply of labourers’ necessaries, though he regularly uses it in a wider sense.  The generalities, therefore, about supply and demand, take us little further.

From these difficulties Ricardo escapes by another method.  Malthus’s theory of population gives him what he requires.  The ’natural price of labour’ (as distinguished from its ‘market price’) is, as he asserts, ’that price which is necessary to enable the labourers, one with another, to subsist and perpetuate their race without either increase or diminution.’ This is the true ‘natural price,’ about which the ‘market price’ oscillates.  An increase of capital may raise wages for a time above the natural price, but an increase of population will bring back the previous rate.  Ricardo warns us, indeed, that this natural price of labour is not to be regarded as something ’absolutely fixed and constant.’ It varies in different times and countries, and even in the same country at different times.  An English cottager now possesses what would once have been luxuries.  Ricardo admits again that the wages of different classes of labourers may be different, although he does not consider that this fact affects his argument.  We may allow for it by considering the skilled labourer as 2 or 1-1/2 labourers rolled into one.  The assumption enables him to get out of a vicious circle.  He is seeking to discover the proportions in which produce will be divided between the two classes, and which co-operate in the production.  The ‘demand and supply’ principle may show that an increase of capital will tend to increase wages, but even that tendency, as he carefully points out, can only be admitted subject to certain important reservations.  In any case, if it explains temporary fluctuations, it will not ascertain the point round which the fluctuations take place.  But the two variables, wages and profit, are clearly connected, and if we can once assume that one of these variables is fixed by an independent law, we may explain in what way the other will be fixed.  Having got rid of ‘rent,’ the remaining produce has to be divided between wages and profit.  If the produce be fixed, the greater the share of the labourer the less will be the share of the capitalist, and vice versa.  But the labourer’s share again is determined by the consideration that it must be such as to enable him to keep up the population.  The capitalist will get the surplus produce after allowing to the labourer the share so determined.  Everything turns ultimately upon this ’natural price’ the constant which underlies all the variations.

One other point is implied.  The population is limited, as we see, by the necessity of raising supplies of food from inferior soils.  Moreover, this is the sole limit.  A different view had been taken which greatly exercised the orthodox economists.  It was generally admitted that in the progress of society the rate of profit declined.  Adam Smith explained this by arguing that, as capital increased, the competition of capitalists lowered the rate.  To this it was replied (as by West) that though competition equalised profits, it could not fix the rate of profit.  The simple increase of capital does not prove that it will be less profitably employed.  The economists had constantly to argue against the terrible possibility of a general ‘glut.’  The condition of things at the peace had suggested this alarm.  The mischief was ascribed to ‘over-production’ and not to misdirected production.  The best cure for our evils, as some people thought, would be to burn all the goods in stock.  On this version of the argument, it would seem that an increase of wealth might be equivalent to an increase of poverty.  To confute the doctrine in this form, it was only necessary to have a more intelligent conception of the true nature of exchange.  As James Mill had argued in his pamphlet against Spence, every increase of supply is also an increase of demand.  The more there is to sell, the more there is to buy.  The error involved in the theory of a ‘glut’ is the confusion between a temporary dislocation of the machinery of exchange, which can and will be remedied by a new direction of industry, and the impossible case of an excess of wealth in general. Malthus never quite cleared his mind of this error, and Ricardo had to argue the point with him.  Abundance of capital cannot by itself, he says, ‘make capital less in demand.’  The ’demand for capital is infinite.’ The decline in the rate of profit, therefore, depends upon another cause.  ’If, with every accumulation of profit, we could tack a piece of fresh fertile land to our Island, profits would never fall.’ Fertile land, however, is limited.  We have to resort to inferior soil, and therefore to employ capital at a less advantage.  In the Principles he enforces the same doctrine with the help of Say, who had shown ‘most satisfactorily’ that any amount of capital might be employed. If, in short, labour and capital were always equally efficient, there would be no limit to the amount producible.  If the supply of food and raw materials can be multiplied, wealth can be multiplied to any amount.  The admitted tendency of profits to fall must therefore be explained simply and solely by the growing difficulty of producing the food and the raw material.

Ricardo’s doctrine, then, is Malthus carried out more logically.  Take a nation in a state of industrial equilibrium.  The produce of the worst soil just supports the labourer, and leaves a profit to the capitalist.  The labourer gets just enough to keep up his numbers to the standard; the capitalist just enough profit to induce him to keep up the capital which supports the labourer.  Since there can be only one rate of wages and only one rate of profit, this fixes the shares into which the whole produce of the nation is divided, after leaving to the landlord the surplus produce of the more fertile soils.  Accepting this scheme as a starting-point, we get a method for calculating the results of any changes.  We can see how a tax imposed upon rents or profits or wages will affect the classes which are thus related; how improvements in cultivation or machinery, or a new demand for our manufactures, will act, assuming the conditions implied in this industrial organisation; how, in short, any disturbance of the balance will work, so as to produce a new equilibrium.  Ricardo exerts all his ingenuity in working out the problem which, with the help of a few assumptions, becomes mathematical.  The arithmetical illustrations which he employed for the purpose became a nuisance in the hands of his disciples.  They are very useful as checks to general statements, but lend themselves so easily to the tacit introduction of erroneous assumptions as often to give a totally false air of precision to the results.  Happily I need not follow him into that region, and may omit any consideration of the logical value of his deductions.  I must be content to say that, so far as he is right, his system gives an economic calculus for working out the ultimate result of assigned economic changes.  The pivot of the whole construction is the ’margin of cultivation’ the point at which the food for a pressing population is raised at the greatest disadvantages.  ‘Profits,’ as he says, ’depend on high and low wages; wages on the price of necessaries; and the price of necessaries chiefly on the price of food, because all other requisites may be increased almost without limit.’

Ricardo takes the actual constitution of society for granted.  The threefold division into landowners, capitalists, and labourers is assumed as ultimate.  For him that is as much a final fact as to a chemist it is a final fact that air and water are composed of certain elements.  Each class represents certain economic categories.  The landlord sits still and absorbs the overflow of wealth created by others.  The labourer acts a very important but in one respect a purely passive part.  His whole means of subsistence are provided by the capitalist, and advanced to him in the shape of wages.  His share in the process is confined to multiplying up to a fixed standard.  The capitalist is the really active agent.  The labourer is simply one of the implements used in production.  His wages are part of the capitalist’s ‘costs of production.’  The capitalist virtually raises labourers, one may say, so long as raising them is profitable, just as he raises horses for his farm.  Ricardo, in fact, points out that in some cases it may be for the farmer’s interest to substitute horses for men. If it be essential to any product that there should be a certain number of labourers or a certain number of horses, that number will be produced.  But when the expense becomes excessive, and in the case of labourers that happens as worse soils have to be broken up for food, the check is provided through its effect upon the accumulation of capital.  That, therefore, becomes the essential point.  The whole aim of the legislator should be to give facilities for the accumulation of capital, and the way to do that is to abstain from all interference with the free play of the industrial forces.  The test, for example, of the goodness of a tax or rather of its comparative freedom from the evils of every tax is that it should permit of accumulation by interfering as little as possible with the tendency of the capital to distribute itself in the most efficient way.

III.  VALUE AND LABOUR

To solve the distribution problem, then, it is necessary to get behind the mere fluctuations of the market, and to consider what are the ultimate forces by which the market is itself governed.  What effect has this upon the theory of the market itself?  This leads to a famous doctrine.

According to his disciple, M’Culloch, Ricardo’s great merit was that he ‘laid down the fundamental theorem of the science of value.’  He thus cleared up what had before been an ‘impenetrable mystery,’ and showed the true relations of profit, wages, and prices. Ricardo’s theory of value, again, was a starting-point of the chief modern Socialist theories.  It marked, as has been said, the point at which the doctrine of the rights of man changes from a purely political to an economical theory.  Ricardo remarks in his first chapter that the vagueness of theories of value has been the most fertile source of economic errors.  He admitted to the end of his life that he had not fully cleared up the difficulty.  Modern economists have refuted and revised and discussed, and, let us hope, now made everything quite plain.  They have certainly shown that some of Ricardo’s puzzles implied confusions singular in so keen a thinker.  That may serve as a warning against dogmatism.  Boys in the next generation will probably be asked by examiners to expose the palpable fallacies of what to us seem to be demonstrable truths.  At any rate, I must try to indicate the critical point as briefly as possible.

The word ‘value,’ in the first place, has varying meanings, which give an opportunity for writers of text-books to exhibit their powers of lucid exposition.  The value of a thing in one sense is what it will fetch; the quantity of some other thing for which it is actually exchanged in the market.  In that sense, as Ricardo incidentally observes, the word becomes meaningless unless you can say what is the other thing.  It is self-contradictory to speak as if a thing by itself could have a constant or any value.  Value, however, may take a different sense.  It is the economic equivalent of the ‘utility’ of Bentham’s ‘felicific calculus.’  It means the ‘lot of pleasure’ which causes a thing to be desirable.  If we could tell how many units of utility it contained we could infer the rate of exchange for other things.  The value of anything ‘in use’ will correspond to the number of units of utility which it contains; and things which have the same quantity of ‘utilities’ will have the same ‘exchangeable value.’  Ricardo can thus consider the old problem of finding ’an invariable measure of value.’  He points out the difficulty of finding any particular thing which will serve the purpose, inasmuch as the relations of everything to everything else are constantly varying.  He therefore proposes to make use of an imaginary measure.  If gold were always produced under exactly the same circumstances, with the same labour and the same capital, it would serve approximately for a standard.  Accordingly he gives notice that, for the purposes of his book, he will assume this to be the case, and money to be ’invariable in value.’ We can thus, on the one hand, compare values at different periods.  A thing has the same value at all times which at all times requires ’the same sacrifice of toil and labour to produce it.’ The ‘sacrifice’ measures the ‘utility,’ and we may assume that the same labour corresponds in all ages to the same psychological unit.  But, on the other hand, at any given period things will exchange in proportion to the labour of producing them.  This follows at once from Ricardo’s postulates.  Given the single rate of wages and profits, and assuming the capital employed to be in the same proportion, things must exchange in proportion to the quantity of labour employed; for if I got the same value by employing one labourer as you get by employing two, my profits would be higher.  Ricardo, indeed, has to allow for many complexities arising from the fact that very different quantities of capital are required in different industries; but the general principle is given by the simplest case.  Hence we have a measure of value, applicable at any given time and in comparing different times.  It implies, again, what M’Culloch sums up as the ’fundamental theorem,’ that the value of ‘freely produced commodities’ depends on the quantity of labour required for their ‘production.’  What is made by two men is worth twice what is made by one man.  That gives what M’Culloch calls the ‘clue to the labyrinth.’

The doctrine leads to a puzzle.  If I can measure the ‘sacrifice,’ can I measure the ‘utility’ which it gains?  The ‘utility’ of an ounce of gold is not something ‘objective’ like its physical qualities, but varies with the varying wants of the employer.  Iron or coal may be used for an infinite variety of purposes and the utility will be different in each.  The thing may derive part of its ‘utility’ from its relation to other things.  The utility of my food is not really separate from the utility of my hat; for unless I eat I cannot wear hats.  My desire for any object, again, is modified by all my other desires, and even if I could isolate a ‘desire’ as a psychological unit, it would not give me a fixed measure.  Twice the article does not give twice the utility; a double stimulus may only add a small pleasure or convert it into agony.  These and other difficulties imply the hopelessness of searching for this chimerical unit of ‘utility’ when considered as a separate thing.  It shifts and escapes from our hands directly we grasp it.  Ricardo discusses some of these points in his interesting chapter on ‘Value and Riches.’  Gold, he says, may cost two thousand times more than iron, but it is certainly not two thousand times as useful. Suppose, again, that some invention enables you to make more luxuries by the same labour, you increase wealth but not value.  There will be, say, twice as many hats, but each hat may have half its former value.  There will be more things to enjoy, but they will only exchange for the same quantity of other things.  That is, he says, the amount of ‘riches’ varies, while the amount of value is fixed.  This, according to him, proves that value does not vary with ‘utility.’  ‘Utility,’ as he declares in his first chapter, is ‘absolutely essential to value,’ but it is ’not the measure of exchangeable value.’ A solution of these puzzles may be sought in any modern text-book.  Ricardo escapes by an apparently paradoxical conclusion.  He is undertaking an impossible problem when he starts from the buyers’ desire of an ‘utility.’  Therefore he turns from the buyers to the sellers.  The seller has apparently a measurable and definable motive the desire to make so much per cent. on his capital. Ricardo, unfortunately, speaks as though the two parties to the bargain somehow represented mutually exclusive processes.  ‘Supply and demand’ determine the value of ‘monopolised articles,’ but the cost of other articles depends not ’on the state of demand and supply,’ but ’on the increased or diminished cost of their production.’ Why ‘not’ and ‘but’?  If supply and demand corresponds to the whole play of motives which determines the bargain, this is like saying, according to the old illustration, that we must attribute the whole effect of a pair of scissors to one blade and not to the other.  His view leads to the apparent confusion of taking for the cause of value not our desire for a thing, but the sacrifice we must make to attain it.  Bentham said, for example, that Ricardo confused ‘cost’ with ‘value.’  The denial that utility must in some sense or other determine value perplexes an intelligible and consistent meaning.  It is clearly true, upon his postulates, that the value of goods, other than ‘monopolised,’ must conform to the cost of production.  He speaks as if he confounded a necessary condition with an ‘efficient cause,’ and as if one of two correlative processes could be explained without the other.  But the fact that there is a conformity, however brought about, was enough for his purpose.  The demand of buyers, he would say, determines the particular direction of production:  it settles whether hats should be made of silk or beaver; whether we should grow corn or spin cotton.  But the ultimate force is the capitalist’s desire for profit.  So long as he can raise labourers’ necessaries by employing part of his capital, he can employ the labour as he chooses.  He can always produce wealth; all the wealth produced can be exchanged, and the demand always be equal to the supply, since the demand is merely the other side of the supply.  The buyer’s tastes decide how the capital shall be applied, but does not settle how much wealth there shall be, only what particular forms it shall take.  Somehow or other it must always adjust itself so that the value of each particular kind shall correspond to the ‘cost of production.’  The cost of production includes the tools and the raw materials, which are themselves products of previous labour.  All capital itself is ultimately the product of labour, and thus, as Ricardo incidentally says, may be regarded as ’accumulated labour.’

This phrase sums up the doctrine which underlies his theory of value and indicates its connection with the theory of distribution.  Ricardo had perceived that the supply and demand formula which would serve sufficiently in problems of exchange, or the fluctuations of market-price, could not be made to solve the more fundamental problem of distribution.  We must look beneath the superficial phenomena and ask what is the nature of the structure itself:  what is the driving force or the mainspring which works the whole mechanism.  We seem, indeed, to be inquiring into the very origin of industrial organisation.  The foundation of a sound doctrine comes from Adam Smith.  Smith had said that in a primitive society the only rule would be that things should exchange in proportion to the labour of getting them.  If it cost twice as much labour to kill a beaver as to kill a deer, one beaver would be worth two deer.  In accepting this bit of what Smith’s commentator, Dugald Stewart, calls ‘theoretical’ or ‘conjectural’ history, Ricardo did not mean to state a historical fact.  He was not thinking of actual Choctaws or Cherokees.  The beaver was exchanged for the deer about the time when the primitive man signed the ‘social contract.’  He is a hypothetical person used for purposes of illustration and simplification.  Ricardo is not really dealing with the question of origins; but he is not the less implying a theory of structure.  It did not matter that the ‘social contract’ was historically a figment; it would serve equally well to explain government.  It did not matter that actual savages may have exchanged beavers and deer by the help of clubs instead of competition in the market.  The industrial fabric is what would have been had it been thus built up.  It can be constructed from base to summit by the application of his formula.  As in the imaginary state of deer and beaver, we have a number of independent persons making their bargains upon this principle of the equivalence of labour; and that principle is supposed to be carried out so that the most remote processes of the industrial machinery can be analysed into results of this principle.  This gives a sufficient clue to the whole labyrinth of modern industry, and there is no need of considering the extinct forms of social structure, which we know to have existed, and under which the whole system of distribution took place under entirely different conditions. A great change has taken place since the time of the deer and beaver:  the capitalist has been developed, and has become the motive power.  The labourer’s part is passive; and the ‘value’ is fixed by the bargaining between the proprietors of ‘accumulated labour,’ forced by competition to make equal profits, instead of being fixed by the equitable bargain between the two hunters exchanging the products of their individual labour.  Essentially, however, the principle is the same.  In the last as in the first stage of society, things are exchanged in proportion to the labour necessary to produce them.  Now it is plain enough that such a doctrine cannot lead to a complete solution of the problem of distribution.  It would be a palpably inadequate account of historical processes which have determined the actual relation of classes.  The industrial mechanism has been developed as a part of the whole social evolution; and, however important the economic forces, they have been inextricably blended with all the other forces by which a society is built up.  For the same reason, Ricardo’s theorem would be inadequate ‘sociologically,’ or as a formula which would enable us to predict the future distribution of wealth.  It omits essential factors in the process, and therefore supposes forces to act automatically and invariably which will in fact be profoundly modified in societies differently organised and composed of individuals differing in character.  The very fundamental assumptions as to the elasticity of population, and the accumulation of capital as wages and profits fluctuate, are clearly not absolute truths.  An increase of the capitalist’s share, for example, at the expense of wages, may lead to the lowered efficiency of the labourer; and, instead of the compensating process supposed to result from the stimulus to accumulation, the actual result may be a general degeneration of the industry.  Or, again, the capacity of labourers to combine both depends and reacts upon their intelligence and moral character, and will profoundly modify the results of the general competition. Such remarks, now familiar enough, are enough to suggest that a full explanation of the economic phenomena would require reference to considerations which lie beyond the proper sphere of the economist.  Yet the economist may urge that he is making a fair and perhaps necessary abstraction.  He may consider the forces to be constant, although he may be fully aware that the assumption requires to be corrected when his formulae are applied to facts.  He may consider what is the play at any given time of the operations of the market, though the market organisation is itself dependent upon the larger organisation of which it is a product.  He does not profess to deal in ‘sociology,’ but ‘pure political economy.’  In that more limited sphere he may accept Ricardo’s postulates.  The rate of wages is fixed at any given moment by the ‘labour market.’  That is the immediate organ through which the adjustment is effected.  Wages rise and fall like the price of commodities, when for any reason the number of hirers or the number of purchasers varies.  The ‘supply and demand’ formula, however, could not, as Ricardo saw, be summarily identified with labour and capital.  We must go behind the immediate phenomena to consider how they are regulated by the ultimate moving power.  Then, with the help of the theories of population and rent, we find that the wages are one product of the whole industrial process.  We must look beyond the immediate market fluctuation to the effect upon the capitalists who constitute the market.  The world is conceived as one great market, in which the motives of the capitalist supply the motive power; and the share which goes to the labourer is an incidental or collateral result of the working of the whole machinery.  Now, though the sociologist would say that this is quite inadequate for his purpose, and that we must consider the whole social structure, he may also admit that the scheme has a validity in its own sphere.  It describes the actual working of the mechanism at any given time; and it may be that in Ricardo’s time it gave an approximate account of the facts.  To make it complete, it requires to be set, so to speak, in a more general framework of theory; and we may then see that it cannot give a complete solution.  Still, as a consistent scheme which corresponds to the immediate phenomena, it helps us to understand the play of the industrial forces which immediately regulate the market.

Ricardo’s position suggested a different line of reply.  The doctrines that capital is ‘accumulated labour’ and that all value is in proportion to the labour fell in with the Socialist theory.  If value is created by labour, ought not ‘labour’ to possess what it makes?  The right to the whole produce of labour seemed to be a natural conclusion.  Ricardo might answer that when I buy your labour, it becomes mine.  I may consider myself to have acquired the rights of the real creator of the wealth, and to embody all the labourers, whose ‘accumulated labour’ is capital.  Still, there is a difficulty.  The beaver and deer case has an awkward ethical aspect.  To say that they are exchanged at such a rate seems to mean that they ought to be exchanged at the rate.  This again implies the principle that a man has a right to what he has caught; that is, to the whole fruits of his labour.  James Mill, as we have seen, starts his political treatise by assuming this as obvious. He did not consider the possible inferences; for it is certainly a daring assumption that the principle is carried out by the economic system.  According to Ricardo rent is paid to men who don’t labour at all.  The fundholder was a weight upon all industry, and as dead a weight as the landlord.  The capitalist, Ricardo’s social mainspring, required at least cross-examination.  He represents ‘accumulated labour’ in some fashion, but it is not plain that the slice which he takes out of the whole cake is proportioned accurately to his personal labour.  The right and the fact which coincided in the deer and beaver period have somehow come to diverge.

Here, then, we are at a point common to the two opposing schools.  Both are absolute ‘individualists’ in different senses.  Society is built up, and all industrial relations determined, by the competition of a multitude of independent atoms, each aiming at self-preservation.  Malthus’s principle applies this to the great mass of mankind.  Systematically worked out, it has led to Ricardo’s identification of value with quantities of labour.  Keeping simply to the matter of fact, it shows how a small minority have managed to get advantages in the struggle, and to raise themselves upon the shoulders of the struggling mass.  Malthus shows that the resulting inequality prevents the struggle from lowering every one to starvation point.  But the advantage was not obvious to the struggling mass which exemplified the struggle for existence.  If equality meant not the initial facts but the permanent right, society was built upon injustice.  Apply the political doctrine of rights of man to the economic right to wealth, and you have the Socialist doctrine of right to the whole produce of labour.  It is true that it is exceedingly difficult to say what each man has created when he is really part of a complex machinery; but that is a problem to which Socialists could apply their ingenuity.  The real answer of the political economists was that although the existing order implied great inequalities of wealth it was yet essential to industrial progress, and therefore to an improvement in the general standard of comfort.  This, however, was the less evident the more they insisted upon the individual interest.  The net result seemed to be that by accident or inheritance, possibly by fraud or force, a small number of persons have got a much larger share of wealth than their rivals.  Ricardo may expound the science accurately; and, if so, we have to ask, What are the right ethical conclusions?

For the present, the Utilitarians seem to have considered this question as superfluous.  They were content to take the existing order for granted; and the question remains how far their conclusions upon that assumption could be really satisfactory.

IV.  THE CLASSICAL POLITICAL ECONOMY

Ricardo had worked out the main outlines of the ’Classical Political Economy’:  the system which to his disciples appeared to be as clear, consistent, and demonstrable as Euclid; and which was denounced by their opponents as mechanical, materialistic, fatalistic, and degrading.  After triumphing for a season, it has been of late years often treated with contempt, and sometimes banished to the limbo of extinct logomachies.  It is condemned as ‘abstract.’  Of all delusions on the subject, replies a very able and severe critic, there is none greater than the belief that it was ’wholly abstract and unpractical.’  Its merits lay in its treatment of certain special questions of the day; while in the purely scientific questions it was hopelessly confused and inconsistent.  Undoubtedly, as I have tried to point out, Malthus and Ricardo were reasoning upon the contemporary state of things.  The doctrine started from observation of facts; it was too ‘abstract’ so far as it neglected elements in the concrete realities which were really relevant to the conclusions.  One cause of confusion was the necessity of starting from the classification implied in ordinary phrases.  It is exemplified by the vague use of such words as ‘capital,’ ‘value,’ ‘supply and demand.’  Definitions, as is often remarked, come at the end of an investigation, though they are placed at the beginning of an exposition.  When the primary conceptions to be used were still so shifting and contradictory as is implied in the controversies of the day, it is no wonder that the formulae should be wanting in scientific precision.  Until we have determined what is meant by ‘force’ we cannot have a complete science of dynamics.  The economists imagined that they had reached the goal before they had got rid of ambiguities hidden in the accepted terminology.  Meanwhile it will be enough if I try to consider broadly what was the nature of the body of statements which thus claimed to be an elaborated science.

Ricardo’s purpose was to frame a calculus, to give a method of reasoning which will enable us to clinch our economic reasoning.  We are to be sure that we have followed out the whole cycle of cause and effect.  Capitalists, landowners, labourers form parts of a rounded system, implying reciprocal actions and reactions.  The imposition of a tax or a tariff implies certain changes in existing relations:  that change involves other changes; and to trace out the total effect, we must understand what are the ultimate conditions of equilibrium, or what are the processes by which the system will adjust itself to the new conditions.  To describe, again, the play of a number of reciprocal forces, we have to find what mathematicians call an ’independent variable’:  some one element in the changes on which all other changes will depend.  That element, roughly speaking, ultimately comes out to be ‘labour.’  The simplicity of the system gave an impression both of clearness and certainty, which was transferred from the reasoning to the premises.  The facts seemed to be established, because they were necessary to the system.  The first step to an estimate of the value of the doctrine would be to draw up a statement of the ‘postulates’ implied.  Among them, we should have such formulae as the single rate of profits and wages; which imply the ‘transferability’ of labour and capital, or the flow of either element to the best-paid employment.  We should have again the Malthusian doctrine of the multiplication of labour up to a certain standard; and the fact that scarcity means dearness and plenty cheapness.  These doctrines at least are taken for granted; and it may perhaps be said that they are approximations which only require qualifications, though sometimes very important qualifications, to hold good of the society actually contemplated.

They were true enough to give the really conclusive answer to many popular fallacies.  The type of sophistry which Ricardo specially assailed was that which results from neglecting the necessary implications of certain changes.  The arguments for the old ’mercantile theory’ for ‘protection’ of industry, for the poor-law, for resisting the introduction of machinery, the fear of ‘gluts’ and all manner of doctrines about the currency were really exposed by the economists upon the right grounds.  It was absurd to suppose that by simply expanding the currency, or by making industry less efficient, or forcing it to the least profitable employments, you were increasing the national wealth; or to overlook the demoralising effects of a right to support because you resolved only to see the immediate benefits of charity to individuals.  It is true, no doubt, that in some cases there might be other arguments, and that the economists were apt to take a narrow view of the facts.  Yet they decisively exploded many bad arguments, and by the right method of enforcing the necessity of tracing out the whole series of results.  It was partly to their success in confuting absurd doctrines that their confidence was due; though the confidence was excessive when it was transferred to the axioms from which they professed to start.  A doctrine may be true enough to expose an error, and yet not capable of yielding definite and precise conclusions.  If I know that nothing can come out of nothing, I am on the way to a great scientific principle and able to confute some palpable fallacies; but I am still a very long way from understanding the principle of the ‘conservation of energy.’  The truth that scarcity meant dearness was apparently well known to Joseph in Egypt, and applied very skilfully for his purpose.  Economists have framed a ‘theory of value’ which explains more precisely the way in which this is brought about.  A clear statement may be valuable to psychologists; but for most purposes of political economy Joseph’s knowledge is quite sufficient.  It is the doctrine which is really used in practice whatever may be its ultimate justification.

The postulates, however, were taken by the economists to represent something more than approximate statements of the fact.  They imply certain propositions which might be regarded as axioms.  Men desire wealth and prefer their own interests.  The whole theory might then be regarded as a direct deduction from the axioms.  It thus seemed to have a kind of mathematical certainty.  When facts failed to conform to the theory the difficulty could be met by speaking, as Malthus spoke, of ‘tendencies,’ or by appealing to the analogy of ‘friction’ in mechanics.  The excuse might be perfectly valid in some cases, but it often sanctioned a serious error.  It was assumed that the formula was still absolutely true of something, and that the check or friction was a really separable and accidental interference.  Thus it became easy to discard, as irrelevant, objections which really applied to the principle itself, and to exaggerate the conformity between fact and theory.  The economic categories are supposed to state the essential facts, and the qualifications necessary to make them accurate were apt to slip out of sight.  Ricardo, to mention a familiar instance, carefully points out that the ‘economic rent,’ which clearly represents an important economic category, is not to be confounded, as in ‘popular’ use, with the payments actually made, which often include much that is really profit.  The distinction, however, was constantly forgotten, and the abstract formula summarily applied to the concrete fact.

The economists had constructed a kind of automaton which fairly represented the actual working of the machinery.  But then, each element of their construction came to represent a particular formula, and to represent nothing else.  The landlord is simply the receiver of surplus value; the capitalist the one man who saves, and who saves in proportion to profit; and the labourer simply the embodiment of Malthus’s multiplying tendency.  Then the postulates as to the ebb and flow of capital and labour are supposed to work automatically and instantaneously.  Ricardo argues that a tax upon wages will fall, not, as Buchanan thought, upon the labourer, nor, as Adam Smith thought, upon rent, but upon profits; and his reason is apparently that if wages were ’lowered the requisite population would not be kept up.’ The labourer is able to multiply or diminish so rapidly that he always conforms at once to the required standard.  This would seem to neglect the consideration that, after all, some time is required to alter the numbers of a population, and that other changes of a totally different character may be meanwhile set up by rises and falls of wages.  Ricardo, as his letters show, was well aware of the necessity of making allowance for such considerations in applying his theorems.  He simplified the exposition by laying them down too absolutely; and the doctrine, taken without qualification, gives the ‘economic man,’ who must be postulated to make the doctrine work smoothly.  The labourer is a kind of constant unit absolutely fixed in his efficiency, his wants, and so forth; and the same at one period as at another, except so far as he may become more prudent, and therefore fix his ‘natural price’ a little higher.  An ‘iron law’ must follow when you have invented an iron unit.  In short, when society is represented by this hypothetical mechanism, where each man is an embodiment of the required formula, the theory becomes imperfect so far as society is made up of living beings, varying, though gradually, in their whole character and attributes, and forming part of an organised society incomparably too complex in its structure to be adequately represented by the three distinct classes, each of which is merely a formula embodied in an individual man.  The general rules may be very nearly true in a great many cases, especially on the stock-exchange; but before applying them to give either a history or a true account of the actual working of concrete institutions, a much closer approximation must be made to the actual data.

I need not enlarge, however, upon a topic which has been so often expounded.  I think that at present the tendency is rather to do injustice to the common-sense embodied in this system, to the soundness of its aims, and to its value in many practical and immediate questions, than to overestimate its claim to scientific accuracy.  That claim may be said to have become obsolete.

One point, however, remains.  The holders of such a doctrine must, it is said, have been without the bowels of compassion.  Ricardo, as critics observe with undeniable truth, was a Jew and a member of the stock-exchange.  Now Jews, in spite of Shylock’s assertions, and certainly Jewish stockbrokers, are naturally without human feeling.  If you prick them, they only bleed banknotes.  They are fitted to be capitalists, who think of wages as an item in an account, and of the labourer as part of the tools used in business.  Ricardo, however, was not a mere money-dealer, nor even a walking treatise.  He was a kindly, liberal man, desirous to be, as he no doubt believed himself to be, in sympathy with the leaders of political and scientific thought, and fully sharing their aspirations.  No doubt he, like his friends, was more conspicuous for coolness of head than for impulsive philanthropy.  Like them, he was on his guard against ‘sentimentalism’ and ‘vague generalities,’ and thought that a hasty benevolence was apt to aggravate the evils which it attacked.  The Utilitarians naturally translated all aspirations into logical dogmas; but some people who despised them as hard-hearted really took much less pains to give effect to their own benevolent impulses.  Now Ricardo, in this matter, was at one with James Mill and Bentham, and especially Malthus. The essential doctrine of Malthus was that the poor could be made less poor by an improved standard of prudence.  In writing to Malthus, Ricardo incidentally remarks upon the possibility of raising the condition of the poor by ‘good education’ and the inculcation of foresight in the great matter of marriage. Incidental references in the Principles are in the same strain.  He accepts Malthus’s view of the poor-laws, and hopes that, by encouraging foresight, we may by degrees approach ’a sounder and more healthful state.’ He repudiates emphatically a suggestion of Say that one of his arguments implies ‘indifference to the happiness’ of the masses, and holds that ‘the friends of humanity’ should encourage the poor to raise their standard of comfort and enjoyment.  The labourers, as he elsewhere incidentally observes, are ’by far the most important class in society.’ How should they not be if the greatest happiness of the greatest number be the legitimate aim of all legislation?

It is true that in his argument Ricardo constantly assumes that his ‘natural price’ will also be the real price of labour.  The assumption that the labourers’ wages tend to a minimum is a base for his general arguments.  The inconsistency, if there be one, is easily intelligible.  Ricardo agreed with Malthus that, though the standard might be raised, and though a rise was the only way to improvement, the chances of such a rise were not encouraging.  Improved wages, as he says, might enable the labourer to live more comfortably if only he would not multiply.  But ’so great are the delights of domestic society, that in practice it is invariably found that an increase of population follows an amended condition of the labourer,’ and thus the advantage is lost as soon as gained.

I have tried to show what was the logical convenience of the assumption.  Ricardo, who has always to state an argument at the cost of an intellectual contortion, is content to lay down a rule without introducing troublesome qualifications and reserves.  Yet he probably held that his postulate was a close approximation to the facts.  Looking at the actual state of things at the worst time of the poor-law, and seeing how small were the prospects of stirring the languid mind of the pauper to greater forethought, he thought that he might assume the constancy of an element which varied so slowly.  The indifference of the Ricardo school generally to historical inquiry had led them no doubt to assume such constancy too easily.  Malthus, who had more leaning to history, had himself called attention to many cases in which the ‘prudential check’ operated more strongly than it did among the English poor.  Probably Ricardo was in this, as in other cases, too hasty in assuming facts convenient for his argument.  The poor man’s character can, it is clear, be only known empirically; and, in fact, Ricardo simply appeals to experience.  He thinks that, as a fact, men always do multiply in excess.  But he does not deny that better education might change their character in this respect.  Indeed, as I have said, an even excessive faith in the possible modification of character by education was one of the Utilitarian tenets.  If Ricardo had said broadly that a necessary condition of the improvement of the poor was a change of the average character, I think that he would have been saying what was perfectly true and very much to the purpose both then and now.  The objection to his version of a most salutary doctrine is that it is stated in too narrow terms.  The ultimate unit, the human being, is indeed supposed to be capable of great modification, but it is solely through increasing his foresight as to the effects of multiplication that the change is supposed to be attainable.  The moral thus drawn implied a very limited view of the true nature and influence of great social processes, and in practice came too often to limiting possible improvement to the one condition of letting things alone.  Let a man starve if he will not work, and he will work.  That, as a sole remedy, may be insufficient; though, even in that shape, it is a doctrine more likely to be overlooked than overvalued.  And meanwhile the acquiescence in the painful doctrine that, as a matter of fact, labourers would always multiply to starvation point, was calculated to produce revolt against the whole system.  Macaulay’s doctrine that the Utilitarians had made political economy unpopular was so far true that the average person resented the unpleasant doctrines thus obtruded upon him in their most unpleasant shape; and, if he was told that they were embodied logic, revolted against logic itself.

V. THE RICARDIANS

It will be quite sufficient to speak briefly of the minor prophets who expounded the classical doctrine; sometimes falling into fallacies, against which Ricardo’s logical instinct had warned him; and sometimes perhaps unconsciously revealing errors which really lurked in his premises.  When Ricardo died, James Mill told M’Culloch that they were ‘the two and only genuine disciples’ of their common friend. Mill wrote what he intended for a Schoolbook of Political Economy. Brief, pithy, and vigorous, it purports to give the essential principles in their logical order; but, as his son remarks, had only a passing importance.  M’Culloch took a more important place by his writings in the Edinburgh Review and elsewhere, and by his lectures at Edinburgh and at London.  He was one of the first professors of the new university.  His Principles of Political Economy became a text-book, to be finally superseded by John Stuart Mill.  Other works statistical and bibliographical showed great industry, and have still their value.  He was so much the typical economist of the day that he has been identified with Carlyle’s M’Crowdy, the apostle of the dismal science. He writes, however, with enough vivacity and fervour of belief in his creed to redeem him from the charge of absolute dulness.  An abler thinker was Colonel (Robert) Torrens (1780-1864). He had served with distinction in the war; but retired on half-pay, and was drawn by some natural idiosyncrasy into the dry paths of economic discussion.  He was already confuting the French economists in 1808; and was writing upon the Bank-charter Act and the Ten Hours’ Bill in 1844.  Torrens held himself, apparently with justice, to be rather an independent ally than a disciple of Ricardo.  His chief works were an essay upon the ‘External Corn-trade’ (1815) and an ’Essay on the Production of Wealth’ (1821).  Ricardo pronounced his arguments upon the Corn-trade to be ’unanswered and unanswerable,’ and he himself claimed to be an independent discoverer of the true theory of rent. He was certainly a man of considerable acuteness and originality.  In these writings we find the most sanguine expressions of the belief that political economy was not only a potential, but on the verge of becoming an actual, science.  Torrens observes that all sciences have to pass through a period of controversy; but thinks that economists are emerging from this stage, and rapidly approaching unanimity.  In twenty years, says this hopeful prophet, there will scarcely exist a ‘doubt of its’ (Political Economy’s) ’fundamental principles.’ Torrens thinks that Ricardo has generalised too much, and Malthus too little; but proposes, with proper professions of modesty, to take the true via media, and weld the sound principles into a harmonious whole by a due combination of observation and theory.  The science, he thinks, is ’analogous to the mixed mathematics.’ As from the laws of motion we can deduce the theory of dynamics, so from certain simple axioms about human nature we can deduce the science of Political Economy.  M’Culloch, at starting, insists in edifying terms upon the necessity of a careful and comprehensive induction, and of the study of industrial phenomena in different times and places, and under varying institutions. This, however, does not prevent him from adopting the same methods of reasoning.  ‘Induction’ soon does its office, and supplies a few simple principles, from which we may make a leap to our conclusions by a rapid, deductive process.

The problems appear to be too simple to require long preliminary investigations of fact.  Torrens speaks of proving by ’strictly demonstrative evidence’ or of ‘proceeding to demonstrate’ by strict analysis. This is generally the preface to one of those characteristic arithmetical illustrations to which Ricardo’s practice gave a sanction.  We are always starting an imaginary capitalist with so many quarters of corn and suits of clothes, which he can transmute into any kind of product, and taking for granted that he represents a typical case.  This gives a certain mathematical air to the reasoning, and too often hides from the reasoner that he may be begging the question in more ways than one by the arrangement of his imaginary case.  One of the offenders in this kind was Nassau Senior (1790-1864), a man of remarkable good sense, and fully aware of the necessity of caution in applying his theories to facts.  He was the first professor of Political Economy at Oxford (1825-1830), and his treatise lays down the general assumption of his orthodox contemporaries clearly and briefly.  The science, he tells us, is deducible from four elementary propositions:  the first of which asserts that every ’man desires to obtain additional wealth with as little sacrifice as possible’; while the others state the first principles embodied in Malthus’s theory of population, and in the laws corresponding to the increasing facility of manufacturing and the decreasing facility of agricultural industry. As these propositions include no reference to the particular institutions or historical development of the social structure, they virtually imply that a science might be constructed equally applicable in all times and places; and that, having obtained them, we need not trouble ourselves any further with inductions.  Hence it follows that we can at once get from the abstract ‘man’ to the industrial order.  We may, it would seem, abstract from history in general.  This corresponds to the postulate explicitly stated by M’Culloch.  ‘A state,’ he tells us, ’is nothing more than an aggregate of individuals’:  men, that is, who ’inhabit a certain tract of country.’ He infers that ‘whatever is most advantageous to them’ (the individuals) ‘is most advantageous to the state.’  Self-interest, therefore, the individual’s desire of adding to his ‘fortune,’ is the mainspring or causa causans of all improvement. This is, of course, part of the familiar system, which applies equally in ethics and politics.  M’Culloch is simply generalising Adam Smith’s congenial doctrine that statesmen are guilty of absurd presumption when they try to interfere with a man’s management of his own property. This theory, again, is expressed by the familiar maxim pas trop gouverner, which is common to the whole school, and often accepted explicitly.

It will be quite enough to notice one or two characteristic results.  The most important concern the relation between the labourer and the capitalist.  Malthus gives the starting-point.  Torrens, for example, says that the ’real wages of labour have a constant tendency to settle down’ to the amount rendered necessary by ‘custom and climate’ in order to keep up his numbers. Mill observes in his terse way that the capitalist in the present state of society ’is as much the owner of the labour’ as the manufacturer who operates with slaves.  The only ’difference is in the mode of purchasing.’ One buys a man’s whole labour; the other his labour for a day.  The rate of wages can therefore be raised, like the price of slaves, only by limiting the supply.  Hence the ’grand practical problem is to find the means of limiting the number of births.’ M’Culloch is equally clear, and infers that every scheme ‘not bottomed on’ the principle of proportioning labour to capital must be ’completely nugatory and ineffectual.’

The doctrine common to the whole school led M’Culloch to conclusions which became afterwards notorious enough to require a word of notice.  Torrens, like Ricardo, speaks of capital as ‘accumulated labour,’ but makes a great point of observing that, although this is true, the case is radically changed in a developed state of society.  The value of things no longer depends upon the labour, but upon the amount of capital employed in their production. This, indeed, may seem to be the most natural way of stating the accepted principle.  M’Culloch replies that the change makes no difference in the principle, inasmuch as capital being ‘accumulated labour,’ value is still proportioned to labour, though in a transubstantiated shape.  M’Culloch supposed that by carrying out this principle systematically he was simplifying Ricardo and bringing the whole science into unity.  All questions, whether of value in exchange, or of the rate of wages, can then be reduced to comparing the simple unit called labour.  Both Mill and M’Culloch regard capital as a kind of labour, so that things may be produced by capital alone, ’without the co-operation of any immediate labour’ a result which can hardly be realised with the discovery of a perpetual motion.  So, again, the value of a joint product is the ‘sum’ of these two values. All value, therefore, can be regarded as proportioned to labour in one of its two states.  M’Culloch advanced to an unfortunate conclusion, which excited some ridicule.  Though Ricardo and Torrens rejected it, it was accepted by Mill in his second edition. Wine kept in a cask might increase in value.  Could that value be ascribed to ’additional labour actually laid out’?  M’Culloch gallantly asserted that it could, though ‘labour’ certainly has to be interpreted in a non-natural sense. Not only is capital labour, but fermentation is labour, or how can we say that all value is proportioned to labour?  This is only worth notice as a pathetic illustration of the misfortunes of a theorist ridden by a dogma of his own creation.  Another conclusion is more important.  The ‘real value’ of anything is measured by the labour required to produce it.  Nothing ‘again is more obvious’ than that equal labour implies the ‘same sacrifice’ in all states of society. It might seem to follow that the value of anything was measured by the labour which it would command.  This doctrine, however, though maintained by Malthus, was, according to M’Culloch, a pestilent heresy, first exploded by Ricardo’s sagacity. Things exchange, as he explains, in proportion to the labour which produces them, but the share given to the labourer may vary widely.  The labourer, he says, ’gives a constant, but receives a variable quantity in its stead.’  He makes the same sacrifice when he works for a day, but may get for it what he produces in ten hours, or only in one.  In every case, however, he gets less than he produces, for the excess ’constitutes profits.’ The capitalist must get his interest, that is, the wages of the accumulated labour.  Here we come again to the Socialist position, only that the Socialist infers that the labourer is always cheated by the capitalist, and does not consider that the machine can ask for ‘wages’ on the pretext that it is accumulated labour.  What, however, determines the share actually received?  After all, as a machine is not actually a labourer, and its work not a separable product, we cannot easily see how much wages it is entitled to receive.  M’Culloch follows the accepted argument.  ‘No proposition,’ he says, ’can be better established than that the market rate of wages ... is exclusively determined by the proportion between capital and population.’ We have ultimately here, as elsewhere, ’the grand principle to which we must always come at last,’ namely, ’the cost of production.’ Wages must correspond to the cost of raising the labourer.  This leads to a formula, which afterwards became famous.  In a pamphlet devoted to the question, he repeats the statement that wages depend upon the proportion between population and capital; and then, as if the phrase were identical, substitutes that portion of capital which is required for the labourer’s consumption.  This is generally cited as the first statement of the ‘wage-fund’ theory, to which I shall have to return.

I need not pursue these illustrations of the awkward results of excessive zeal in a disciple.  It is worth noticing, however, that M’Culloch’s practical conclusions are not so rigid as might be inferred.  His abstract doctrines do not give his true theory, so much as what he erroneously took to be his theory.  The rules with which he works are approximately true under certain conditions, and he unconsciously assumes the conditions to be negligible, and the rules therefore absolute.  It must be added that he does not apply his conclusions so rigidly as might be expected.  By the help of ‘friction,’ or the admission that the ride is only true in nineteen cases out of twenty, he can make allowance for many deviations from rigid orthodoxy.  He holds, for example, that government interference is often necessary.  He wishes in particular for the establishment of a ’good system of public education.’ He seems to have become more sentimental in later years.  In the edition of 1843 he approves the Factory Acts, remarking that the last then passed ’may not, in some respects, have gone far enough.’ He approves a provision for the ‘impotent poor,’ on the principle of the Elizabethan act, though he disapproves the centralising tendency of the new poor-law.  Though he is a good Malthusian, and holds the instinct of population to be a ’constant quantity,’ he does not believe in the impossibility of improvement.  The ‘necessary’ rate of wages fixes only a minimum:  an increase of population has been accompanied by an increase of comfort. Wages rise if the standard of life be raised, and a rise of wages tends to raise the standard.  He cordially denounces the benevolent persons who held that better wages only meant more dissipation.  Better wages are really the great spur to industry and improvement. Extreme poverty causes apathy; and the worst of evils is the sluggishness which induces men to submit to reductions of wages.  A sense of comfort will raise foresight; and the vis medicatrix should be allowed to act upon every rank of society.  He is no doubt an individualist, as looking to the removal of restrictions, such as the Conspiracy Laws, rather than to a positive action of the government; but it is worth notice that this typical economist is far from accepting some of the doctrines attributed to the school in general.

The classical school blundered when it supposed that the rules which it formulated could be made absolute.  To give them that character, it was necessary to make false assumptions as to the ultimate constitution of society; and the fallacy became clear when the formulae were supposed to give a real history or to give first principles, from which all industrial relations could be deduced.  Meanwhile, the formulae, as they really expressed conditional truths, might be very useful so long as, in point of fact, the conditions existed, and were very effective in disposing of many fallacies.  The best illustration would probably be given by the writings of Thomas Tooke (1774-1858), one of the founders of the Political Economy Club.  The History of Prices is an admirable explanation of phenomena which had given rise to the wildest theories.  The many oscillations of trade and finance during the great struggle, the distress which had followed the peace, had bewildered hasty reasoners.  Some people, of course, found consolation in attributing everything to the mysterious action of the currency; others declared that the war-expenditure had supplied manufacturers and agriculturists with a demand for their wares, apparently not the less advantageous because the payment came out of their own pockets. Tooke very patiently and thoroughly explodes these explanations, and traces the fluctuations of price to such causes as the effect of the seasons and the varying events of the war which opened or closed the channels of commerce.  The explanation in general seems to be thoroughly sound and conclusive, and falls in, as far as it goes, with the principles of his allies.  He shows, for example, very clearly what were the conditions under which the orthodox theory of rent was really applicable; how bad seasons brought gain instead of loss to the ‘agricultural interest,’ that is, as Tooke explains, to the landlord and farmer; how by a rise of price out of proportion to the diminution of supply, the farmer made large profits; how rents rose, enclosure bills increased, and inferior land was brought under the plough.  The landlord’s interest was for the time clearly opposed to that of all other classes, however inadequate the doctrine might become when made absolute by a hasty generalisation.  I need not dwell upon the free-trade argument which made the popular reputation of the economists.  It is enough to note briefly that the error as to the sphere of applicability of the doctrine did not prevent many of the practical conclusions from being of the highest value.