1902 Encyclopedia > Political Economy (Economics) > Political Economy - Third Modern Phase (cont) - Adam Smith, etc. - England (cont.)

Political Economy
(Part 9)




THIRD MODERN PHASE: SYSTEM OF NATURAL LIBERTY (cont.)

2. Adam Smith, with his Immediate Predecessors and his Followers

England (cont.)


David Ricardo

David Ricardo (1772-1823) is essentially of the school of Smith, whose doctrines he in the main accepts, whilst he seeks to develop them, and to correct them in certain particulars. But his mode of treatment is very different from Smith’s. The latter aims at keeping close to the realities of life as he finds them,—at representing the conditions and relations of men and things as they are ; and, as Hume remarked on first reading his great work, his principles are everywhere exemplified and illustrated with curious facts. Quite unlike this is the way in which Ricardo proceeds. He moves in a world of abstractions. He sets out from more or less arbitrary assumptions, reasons as true, without allowing for the partial unreality of the conditions assumed or confronting his results with experience. When he seeks to illustrate his doctrines, it is from hypothetical cases,—his favourite being that of imagining two contracting savages, and considering how they would be likely to act. He does not explain—probable he had not systematically examined, perhaps was not competent to examine—the appropriate method of political economy ; and the theoretic defence of his mode of proceeding was left to be elaborated by J. S. Mill and Cairnes. But his example had a great effect in determining the practice of his successors. There was something highly attractive to the ambitious theorist in the sweeping march of logic which seemed in Ricardo’s hands to emulate the certainty and comprehensiveness of mathematical proof, and in the portable and pregnant formulae which were so convenient in argument, and gave a prompt, if often a more apparent than real, solution of difficult problems. Whatever there was of false or narrow in the fundamental positions of Smith had been in a great degree corrected by his practical sense and strong instinct for reality, but was brought out in its full dimensions and even exaggerated in the abstract theorems of Ricardo and his followers.

The dangers inherent in his method were aggravated by the extremes looseness of his phareology. Senior pronounces him "the most incorrect writer who ever attained philosophical eminence." His most ardent admirers find him fluctuating and uncertain in the use of words, and generally trace his errors to a confusion between the ordinary employment of a term and some special application of it which he has himself devised.

The most complete exposition of his system is to be found in his Principles of Political Economy and Taxation (1817). This work is not a complete treatise on the science, but a rather loosely connected series of disquisitions on value an price, rent, wages and profits, taxes, trade, money and banking. Yet, though connexion of the parts is loose, the same fundamental ideas recur continually and determine the character of the entire scheme.

The principal problem to which he addresses himself in this work is that of distribution,—that is to say, the proportions of the whole produce of the country which will be allotted to the proprietor of land, to the capitalist, and to the labourer. And it is important to observe that it is especially the variations in their respective portions which take place in the progress of society that he professes to study,—one of the most unhistorical of writers thus indicating a sense of the necessity of a doctrine of economic dynamics—a doctrine which, from his point of view, it was impossible to supply.

The principle which he puts first in order, and which is indeed the key to the whole, is this—that the exchange value of any commodity the supply of which can be increased at will is regulated, under a régime of free competition, by the labour necessary for its production. Similar propositions are to be found in the Wealth of Nations, not to speak of earlier English writings. Smith had said that, "in the early and rude state of society which precedes both the accumulation of stock and the appropriation of land, the proportion between the quantities of labour necessary for acquiring different objects seems to be the only circumstance which can afford any rule for exchanging them with one another." But he wavers in his conception, and presents as the measure of value sometimes the quantity of labour for the production of the object, sometimes the quantity of labour which the object would command in the market, which are identical only for a given time and place. The theorem requires correction for a developed social syste by the introduction of the consideration of capital, and takes the form in which it is elsewhere quoted from Malthus by Ricardo, that the real price of a commodity "depends on the greater or less quantity of capital and labour which must be employed to produce it." (The expression "quantity of capital" is lax, the element of time being omitted, but the meaning is obvious). Ricardo, however, constantly takes no notice of capital, mentioning labour alone in his statement of this principle, and seeks to justify his practice by treating capital as "accumulated labour" ; but this artificial way of viewing that facts obscures the nature of the co-operation of capital in production, and by keeping the necessity of this co-operation out of sight has encouraged some socialistic errors. Ricardo does not sufficiently distinguish between the cause or determinant and the measure of value ; nor does he carry back the principle of cost of production as regulator of value to its foundation in the effect of that cost on the limitation of supply. It is the "natural price" of a commodity that is fixed by the theorem we have stated ; the market price will be subject to accidental and temporary variations from this standard, depending on changes in demand and supply ; but the price will, permanently and in the long run, depend on cost of production defined as above. On this basis Ricardo goes on to explain the laws according to which the produce of the land and the labour of the country is distributed amongst the several classes take part in production.

The theory of rent, with which be begins, though commonly associated with his name, and though it certainly forms the most vital part of his general economic scheme, was not really his, nor did he lay claim to it. He distinctly states in the preface to the Principles, that "in 1815 Mr Malthus, in his Inquiry into the Nature and Progress of Rent, and a fellow of University College, Oxford, in his Essay on the Application of Capital to Land, presented to the world, nearly at the same moment, the true doctrine of rent." The second writer here referred to was Sir Edward West, afterwards a judge of the supreme court of Bombay. Still earlier than the time of Malthus and West, as M ‘Culloch has pointed out, this doctrine had been clearly conceived and fully stated by Dr James Anderson in his Enquiry into the Nature of Corn-Laws, published at Edinburgh in 1777. That this tract was unknown to Malthus and West we have every reason to believe ; but the theory is certainly as distinctly enunciated and as satisfactorily supported in it as in their treatises ; and the whole way in which it is put forward by Anderson strikingly resembles the form in which it is presented by Ricardo .

The essence of the theory is that rent, being the price paid by the cultivator to the owner of land for the use of its productive powers, is equal to the excess of the price of the produce of the land over the cost of production on that land. With the increase of population, and therefore of demand for food, inferior soils will be taken into cultivation; and the price of the entire supply necessary for the community will be regulated by the cost of production of that portion of the supply which is produced at the greatest expense. But for the land which will barely repay the cost of cultivation no rent will be pain. Hence the rent of any quality of land will be equal to the difference between the cost of production on that land and the cost of production of that produce which is raised at the greatest expense.

The doctrine is perhaps most easily apprehended by means of the supposition here made of the coexistence in a country of a series of soils of different degrees of fertility which are successively taken into cultivation as population increases. But it would be an error to believe, though Ricardo sometimes seems to imply it, that such difference is a necessary condition of the existence of rent. If all the land of a country were of equal fertility, still if it were appropriated, and if the price of the produce were more than an equivalent for the labour and capital applied to its production, rent would be paid. This imaginary case, however, after using it to clear our conceptions, we may for the future leave out of account.

The price of produce being, as we have said, regulated by the cost of production of that which pays no rent, it is evident that "corn is not high because a rent is paid, but a rent is paid because corn is high," and that "no reduction would take place in the price of corn although landlords should forego the whole of their rent." Rent is, in fact, no determining element of price ; it is paid, indeed, out of the price, but the price would be the same if no rent were paid, and the whole price were retained by the cultivator.





It has often been doubted whether or not Adam Smith held this theory or rent. Sometimes he uses language which seems to imply it, and states proportions which, if developed, would infallibly lead to it. Thus he says, in a passage already quoted, "such parts only of the produce of land can commonly be brought to market of which the ordinary price is sufficient to replace the stock which must be employed in bringing them thither, together with its ordinary profits. If the ordinary price is more than this, the surplus part of it will naturally go to the rent of land. If it is not more, though the commodity can be brought to market, it can afford no rent to the landlord. Whether the price is or is not more depends on the demand." Again, in Smith’s application of these considerations to mines, "the whole principle of rent," Ricardo tells us, "is admirably and perspicuously explained." But he had formed the opinion that there is in fact no land which does not afford a rent to the landlord ; and, strangely, he seems not to have seen this appearance might arise from the aggregation into an economic whole of parcels of land which can and other which cannot pay rent. The truth, indeed, is that the fact, if it were a fact that all the land in a country pays rent would be irrelevant as an argument against the Andersonian theory, for it is the same thing in substance if there be any capital employed on land already cultivated which yield a return no more than equal to ordinary profits. Such last-employed capital cannot afford rent at the existing rate of profit, unless the price of produce should rise.

The belief which some have entertained that Smith, notwithstanding some vague or inaccurate expressions, really held the Andersonian doctrine, can scarcely be maintained when we remember that Hume, writing to him after having read for the first time the Wealth of Nations, whilst expressing general agreement with his opinions, said (apparently with reference to bk. I. chap. vii), " I cannot think that the rent of farms makes any part of the price of the produce, but that the price is determined altogether by they quantity and the demand." It is further noteworthy that a statement of the theory of rent is given in the same volume, published in 1777, when contains Anderson’s polemic against Smith’s objections to a bounty on the exportation of corn ; this volume can hardly have escaped Smith’s notice, yet neither by its contents nor by Hume’s letter was he led to modify what he had said in his first edition on the subject of rent.

It must be remembered that not merely the unequal fertilities of different soils well determines differences of rent ; the more or less advantageous situation of a farm in relation to markets, and therefore to roads and railways, will have a similar effect. Every diminution of the cost of transit will enable the produce to be brought to market at a smaller expense, and will thus increase the surplus which constitutes rent. This consideration is indicated by Ricardo, though he does not give it prominence, but dwells mainly on the comparative productiveness of soils.

Rent is defined by Ricardo as the price paid for the use of "the original and indestructible powers of the soil." He thus differentiates rent, as he uses the term, from what is popularly designated by the word ; and, when it is to be taken in his sense, it is often qualified as the "true" or "economic" rent. Part of what is paid to the landlord is often really profit on his expenditure in preparing the farm for cultivation by the tenant. But it is to be borne in mind that wherever such improvements are "amalgamated with the land," and "add permanently to its productive powers," the return for them follows the laws, not of profit, but of rent. Hence it becomes difficult, if not impossible, in practice to discriminate with any degree of accuracy the amount received by the landlord "for the use of the original powers of the soil" from the amount received by him as remuneration for his improvements or those made by his predecessors. These have raised the farm, as an instrument for producing food, from one class of productiveness to a higher, and the case is the same as if nature had originally placed the land in question in that higher class.

Smith had treated it as the public privilege of agriculture, as compared with other forms of production, that in it "nature labours along with man," and therefore, whilst the workmen in manufactures occasion the reproduction merely of the capital which employs them with its owner’s profits, the agricultural labourer occasions the reproduction, not only of the employer’s capital with profits, but also of the rent of the landlored. This last he viewed as the free gift of nature which remained "after deducting or compensating everything which can be regarded as the work of man." Ricardo justly observes in reply that "there isnot a manufacture which can be mentioned in which nature does not give her assistance to man." He then goes on the quote from Buchanan the remark that "the notion of agriculture yielding a produce and a rent in consequence, because nature concurs with industry in the process of cultivation, is a mere fancy. It is not from the produce, but from the price at which the produce is sold, that the rent is derived ; and this price is got, not because nature assists in the production, but because it is the price which suits the consumption to the supply."1 There is no gain to the society at large from the rise of rent ; it is advantageous to the landlords alone, and their interests are thus permanently in opposition to those of all other classes. The rise of rent may be retarded, or prevented, or even temporarily changed to a fall, by agricultural improvements, such as the introduction of a new manures or of machines or of a better organization of labour (though there is not so much room for this last as in other branches of production), or the opening of new sources of supply in foreign countries ; but the tendency to a rise is constant so long as the population increases.

The great importance of the theory of rent in Ricardo’s system arises from the fact that he makes the general economic condition of the society to depend altogether on the position in which agricultural exploitation stands. This will be seen from the following statement of his theory of wages and profits. The produce of every expenditure of labour and capital being divided between the labourer and the capitalist, in proportion as one obtains more the other will necessarily obtain less. The productiveness of labour being given, nothing can diminish profit but a rise of wages, or increase it but a fall of wages. Now the price of labour, being the same as its cost of production, is determined by the price of the commodities necessary for the support of the labourer. The price of such manufactured articles as he requires has a constant tendency to fall, principally by reason of the progressive application of the division of labour to their production. But the cost of his maintenance essentially depends, not on the price of those articles, but on that of his food ; and, as the production of food will in the progress of society and of population require the sacrifice of more and more labour, its price will rise; money wages will consequently rise, and with the rise of wages profits will fall. Thus it is to the necessary gradual descent to inferior soils, or less productive expenditure on the same soil, that the decrease in the rate of profit which has historically taken place is to be attributed (Smith ascribed this decrease to the competition of capitalists, though in one place, book I. chap. ix., he had a glimpse of the Ricardian view). This gravitation of profits towards a minimum is happily checked at times by improvements of the machinery employed in the production of necessaries, and especially by such discoveries in agriculture and other causes as reduce the cost of the prime necessary of the labourer ; but, here again, the tendency is constant. Whilst the capitalist thus loses, the labourer does not gain ; his increased money wages only enable him to pay the increased price of his necessaries, of which he will have no greater and probably a less share than he had before. In fact, the labourer can never for any considerable time earn more than what is required to enable the class to subsist in such a degree of comfort as custom had made indispensable to them, and to perpetuate their race without either increase or diminution. That is the "natural" price of labours; and if the market rate temporarily rises above it population will be stimulated, and the rate of wages will again fall. Thus, whilst rent has a constant tendency to rise and profit to fall, the rise or fall of wages will depend on the rate of increase of the working classes. For the improvement of their condition Ricardo thus has to fall back on the Malthusian remedy, of the effective application to fall back on the Malthusian remedy, of the effective application of which he does not, however, seem to have much expectation. The securities against a superabundant population to which he points are the gradual abolition of the poor laws—for their amendment would not content him—and the development amongst the working classes of a taste for greater comforts and enjoyments.

It will be seen that socialists have somewhat exaggerated in announcing, as Ricardo’s "iron law" of wages, their absolute identity with the amount necessary to sustain the existence of the labourer and enable him to continue the race. He recognizes the influence of a "standard of living" as limiting the increase of the numbers of the working classes, and so keeping their wages above the lowest point. But he also holds that, in long-settled countries, in the ordinary course of human affairs, and in the absence of special efforts restricting the growth of population, the condition of the labourer will decline as surely, and from the same causes, as that of the landlord will be improved.

If we are asked whether this doctrine of rent, and the consequences which Ricardo deduced from it, are true, we must answer that they are hypothetically true in the most advanced industrial communities, and there are only (though they have been rashly applied to the cases of India and Ireland), but that even in those communities neither safe inference nor sound action can be built upon them. As we shall see hereafter, the value of most of the theorems of the classical economics is a good deal attenuated by the habitual assumptions that we are dealing with "economic men" actuated by one principle only; that custom, as against competition, has no existence ; that there is no such thing as combination ; that there is equality of contract between the parties to each transaction, and that there is indefinite universal rate of profit and wages in a community, which implies that the capital embarked in any undertaking will pass at once to another in which larger profits are for the time to be made ; that a labourer, whatever his local ties of feeling, family, habit, or other engagements, will transfer himself immediately to any place where, or employment in which, for the time, larger wages are to earned than those he had previously obtained ; and that both capitalists and labourers have a perfect knowledge of the condition and prospects of industry throughout the country, both in their own and other occupations. But in Ricardo’s speculation. The influence of emigration, which has assumed vast dimensions since his time, is left out of account, and the amount of land at the disposal of a community is supposed limited to its own territory, whilst Europe is in fact largely fed by the western States of America. He did not adequately appreciate the degree in which the augmented productiveness of labour, whether from increased intelligence, improved organization, introduction of machinery, or more rapid and cheaper communication, steadily keeps down the cost of production. To these influences must be added those of legal reforms in tenure, and fairer conditions in contracts, which operate in the same direction. As a result of all tracts, which operate in the same direction. As a result of all these causes, the pressure anticipated by Ricardo is not felt, and the cry is rather of the landlords over falling rents than of the consumer over rising prices. The entire conditions are in fact so altered that Prof. Nicholson, no enemy to the "orthodox" economics, when recently conducting an inquiry into the present state of the agricultural question, pronounced the so-called Ricardian theory of rent "too abstract to be of practical utility."





A particular economic subject on which Ricardo has thrown a useful light is the nature of the advantages derived from foreign commerce, and the conditions under which such commerce can go on. Whilst preceding writers had represented those benefits as consisting in affording a vent for surplus produce, or enabling a portion of the national capital to replace itself with a profit, he pointed out that they consist "simply and solely in this, that it enables each nation to obtain, with a given amount of labour and capital, a greater quantity of all commodities taken together." This is no doubt the point of view at which we should habitually place ourselves ;but the other forms of expression employed by his predecessors are sometimes useful as representing real considerations affecting national production, and need not be absolutely disused. Ricardo proceeds to show that what determines the purchases of any commodity from a foreign country is not the circumstance that it can be produced with less labour and capital than at home. If we have a greater positive advantage in the production of some other article than in that of the commodity in question, even though we have an advantage in producing the latter, it may be our interest to devote ourselves to the production of that in which we have the greatest advantage, and to import that in producing which we should have a less, though a real, advantage. It is, in short, not absolute cost of production, but comparative cost, which determines the interchange. This remark is just and interesting. Though an undue importance seems to be attributed to it by J. S. Mill and Cairnes, the latter of whom magniloquently describes it as "sounding the depths" of the problem of international dealings,—though, as we shall see hereafter, he modifies it by the introduction of certain considerations respecting the conditions of domestic production.

For the nation as a whole, according to Ricardo, it is not the gross produce of the land and labour, as Smith seems to assert, that is of importance, but the net income—the excess, that is, of this produce over the cost of production, or, in other words, the amount of its rent and its profits ; for the wages of labour, not essentially exceeding the maintenance of the labourers, are by him considered only as a part of the "necessary expresses of production." Hence it follows, as he himself in a characteristic and often quoted passage says, that, "provided the net real income of the nation be the same, it is of no importance whether it consists of ten or twelve millions of inhabitants. If five millions of men could produce as much food and clothing as was necessary for ten millions, food and clothing for five millions would be the net revenue. Would it be of any advantage to the country that to produce this same net revenue seven millions of men should be required,—that is to say, that seven millions should be employed to produce food and clothing sufficient for twelve millions? The food and clothing of five millions number of men would enable us neither to add a man to our army and navy nor to contribute one guinea more in taxes." Industry is here viewed, just as by the mercantilists, in relation to the military and political power of the state, not to the maintenance and improvement of human beings, as its end and aim. The labourer, as Held his remarkable, is regarded not as a member of society, but as a means to the ends of society, on whose sustenance a part of the gross income must be expended, as another part must be spent on the sustenance of horses. We may well ask, as Sismondi did in a personal interview with Ricardo, "What! is wealth then everything? Are men absolutely nothing?"

On the whole what seems to us true of Ricardo is this, that, whilst he had remarkable powers, they were not the powers best fitted for sociological research. Nature intended him rather for a mathematician of the second order than for a social philosopher. Nor had he the due previous preparation for social studies; for we must decline to accept Bagehot’s idea that, though "in no high sense an educated man," he had a specially apt training for such studies in his practice as an eminently successful stockjobber. The same writer justly notices the "anxious penetration with which he follows out rarefied minutiae." But he wanted breadth of survey, a comprehensive view of human nature and human life, and the strong social sympathies which, as the greatest minds have recognized, are a most valuable aid in this department of study. On a subject like that of money, where a few elementary propositions—into which no moral ingredient enters—have alone to be kept in view, he well adapted to succeed ; but in the larger social field he is at fault. He had great deductive readiness and skill (though his logical accuracy, as Mr Sidgwick remarks, has been greatly exaggerated). But in human affairs phenomena are so complex, and principles so constantly limit or even compensate one anther, that rapidity and daring in deduction may be the greatest of dangers, if they are divorced from a wide and balanced appreciation of facts. Dialectic ability is, no doubt, a valuable gift, but the first condition for success in social investigation is to see things as they are.

A sort of Ricardo-mythus for some time existed in economic circles. It cannot be doubted that the exaggerated estimate of his merits arose in part from a sense of the support his system gave to the manufacturers and other capitalists in their growing antagonism to the old aristocracy of landowners. The same tendency, as well as his affinity to their too abstract an unhistorical modes of thought, and their eudaiemonistic doctrines, recommended him to the Benthamite group, and to the so-called Philosophical Radicals generally. Brougham said he seemed to have dropped from heaven—a singular avatar, it must be owned. His real services in connexion with questions of currency and banking naturally created a prepossession in favour of his more general views. But, apart from those special subjects, it does not appear that, either in the form of solid theoretic teaching or of valuable practical guidance, he has really done much for the world, whilst he admittedly misled opinion on several important questions. De Quincey’s presentation of him as a great revealer of truth is now seen to be an extravagance. J. S. Mill and others speak of his "superior lights" as compared with those of Adam Smith ; but his work, as a contribution to our knowledge of human society, will not bear a moment’s comparison with the Wealth of Nations.

It is interesting to observe that Malthus, though the combination of his doctrine of population with the principles of Ricardo composed the creed for some time professed by all the "orthodox" economists, did not himself accept the Ricardian scheme. He prophesied that "the main part of the structure would not stand." "The theory," he says, "takes a partial view of the subject, like the system of the French economists ; and, like that system, after having drawn into its vortex a great number of very clever men, it will be unable to support itself against theories which, though less simple and captivating, are more just, on account of their embracing more of the causes which are in actual operation in all economical results.

We saw that the foundations of Smiths’ doctrine in general philosophy were unsound, and the ethical character of his scheme in consequence injurisouly affected ; but his method, consisting in a judicious combination of induction and deduction, we found (so far as the statical study of economic laws is concerned) little open to objection. Mainly through the influence of Ricardo, economic method was perverted. The science was led into the mistaken course of turning its back on observation, and seeking to evolve the laws of phenomena out of a few hasty generalizations in recent times not unjustly attributed to the members of the "orthodox" school were all encouraged by his example, namely,—(1) the viciously abstract character of the conceptions with which they deal, (2) the abusive preponderance of deduction in their processes of research, and (3) the too absolute way in which their conclusions are conceived and enunciated.

The two works of Malthus already named are by far the most important in the history of the science. He was also author of Principles of Political Econony (1820), Definitions in Political Economy, and some minor pieces. The works of Ricardo have been collected in one volume, with a biographical notice, by J. R. M ‘Culloch (1846).


Footnotes

FOOTNOTE (p. 375)

1 Senior, however, has pointed out that Smith is partly right ; whilst it is true that rent is demanded because the productive powers of nature are limited, and increased population requires a less remunerative expenditure in order to obtain the necessary supply, on the other hand, it is the power which most land possesses of producing the subsistence of more persons than are required for its cultivation that supplies the fund out of which rent can be paid.


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