agriculture, except in a few provinces, advances slowly, population advances still more slowly, and even with increasing slowness, its growth being kept down, not by poverty, which is diminishing, but by prudence.
Moreover, the cheapened cost of transportation has admitted to England and the Continent the wheat supplies of our Western States at a low price even after having been carried to transatlantic markets. New methods of getting food-supplies from foreign countries act equally with improvements at home.
§ 5. Effect of the Progress of Society in moderating fluctuations of Value.
Thus far, of the effect of the progress of society on the permanent or average values and prices of commodities. It remains to be considered in what manner the same progress affects their fluctuations. Concerning the answer to this question there can be no doubt. It tends in a very high degree to diminish them.
In poor and backward societies, as in the East, and in Europe during the middle ages, extraordinary differences in the price of the same commodity might exist in places not very distant from each other, because the want of roads and canals, the imperfection of marine navigation, and the insecurity of communications generally, prevented things from being transported from the places where they were cheap to those where they were dear. The things most liable to fluctuations in value, those directly influenced by the seasons, and especially food, were seldom carried to any great distances. In most years, accordingly, there was, in some part or other of any large country, a real dearth; while a deficiency at all considerable, extending to the whole world, is [now] a thing almost unknown. In modern times, therefore, there is only dearth, where there formerly would have been famine, and sufficiency everywhere when anciently there would have been scarcity in some places and superfluity in others.
The same change has taken place with respect to all other articles of commerce. The safety and cheapness of communications, which enable a deficiency in one place to be supplied from the surplus of another, at a moderate or even a small advance on the ordinary price, render the fluctuations of prices much less extreme than formerly. This effect is much promoted by the existence of large capitals, belonging to what are called speculative merchants, whose business it is to buy goods in order to resell them at a profit. These dealers naturally buying things when they are cheapest, and storing them up to be brought again into the market when the price has become unusually high, the tendency of their operations is to equalize price, or at least to moderate its inequalities. The prices of things are neither so much depressed at one time, nor so much raised at another, as they would be if speculative dealers did not exist.
Mr. Mill uses the term “speculative” in a different sense from that which is customary in this country. Merchants who buy outright and store up grain are not speculators in the sense in which the word is used with us; but those gamblers who purchase, “for future delivery,” grain which they never see, and which they sell in the same way, are here known as speculators.
It appears, then, that the fluctuations of values and prices arising from variations of supply, or from alterations in real (as distinguished from speculative) demand, may be expected to become more moderate as society advances. With regard to those which arise from miscalculation, and especially from the alternations of undue expansion and excessive contraction of credit, which occupy so conspicuous a place among commercial phenomena, the same thing can not be affirmed with equal confidence. Such vicissitudes, beginning with irrational speculation and ending with a commercial crisis, have not hitherto become either less frequent or less violent with the growth of capital and extension of industry. Rather they may be said to have become more so, in consequence, as is often said, of increased competition, but, as I prefer to say, of a lower rate of profits and interest, which makes capitalists dissatisfied with the ordinary course of safe mercantile gains. The connection of this low rate of profit with the advance of population and accumulation is one of the points to be illustrated in the ensuing chapters.
Mr. Cairnes also adds some investigations as to the fluctuations of value: “Hitherto I have examined the derivative laws of value in so far only as they are exemplified in the movements of _normal_ prices. It will be interesting now to consider whether it is possible to discover in the movements of _market_ prices any corresponding phenomena.
“Taking manufactures first, it is evident at once that, as regards conditions of protection, the circumstances of the case are such as to secure, in general, (1.) great rapidity and great certainty in bringing commodities to market. A deal table may be made in a few hours, a piece of cloth in a few weeks, and a moderate-sized house in a month or little more. Tables, cloth, and houses may be produced with certainty in any quantity required. It results from this that it is scarcely possible that, under ordinary circumstances, the selling price of a product of manufacture should for any long time much exceed its normal price. (2.) The nature of manufactures is, in general, such as to fit them admirably for distant transport. Any considerable elevation of price, therefore, is pretty certain to attract supplies from remote sources. (3.) Further, considered in their relation to human needs, I think it may be said of manufactured goods, that either the need for them is not very urgent, or, where it happens to be so, substitutes...may easily be found. From all these circumstances it results that an advance in the price...either attracts supplies, or deters purchasers,...preventing any great departure from the usual terms of the market.
“Turning now to the products of agricultural, pastoral, or, more generally, ‘extractive’ industry, we find the circumstances under which this class of goods is brought to market in all respects extremely different from those which we have just examined, and such as to permit a much wider margin of deviation for the market from the normal price. Here the period of production is longer, the result of the process much more uncertain, the commodity at once more perishable and less portable, and human requirements in relation to it are mostly of a more urgent kind: (1.) The shortest period within which additions can be made to the supply of food and raw material of the vegetable kind is in general a year, and, if the commodity be of animal origin, the minimum is considerably larger. (2.) Again, the farmer may decide upon the breadth of ground to be devoted to a particular crop, or upon the number of cattle he will maintain; but the actual returns will vary according to the season, and may prove far in excess or far in defect of his calculations. These circumstances all present obstacles to the adjustment of supply and demand, and consequently tend to produce frequent and extensive deviations of the market from the normal price. Nor are the other conditions of the case such as to neutralize the influence of such disturbing agencies.
(3.) The nature, indeed, of some of the principal agricultural products fits them sufficiently well for distant transport, and so far tends to correct fluctuations of price. But, on the other hand, (4.) the relation of these products to human wants is such as greatly to enhance that tendency to violent fluctuation incident to the conditions of their production. More especially is this the case with the commodity, whatever it may be, which forms the staple food of a people. For observe the peculiar nature of human requirements with reference to such a commodity. They are of this kind, that, given the number of a population, the quantity of the staple food required is nearly a fixed quantity, and this almost irrespective of price. Except among the poorest, increased cheapness will not stimulate a larger consumption; while, on the other hand, all, at any cost within the range of their means, will obtain their usual supply. The consequence is that, when even a moderate deficiency or excess occurs in the supply of the staple food of a people, in the one case (_a_), the competition of consumers for their usual quantum of food rapidly forces up the price far out of proportion to the diminution in the supply; in the other (_b_), no one being inclined to increase his usual consumption, the competition of sellers, in their eagerness to find a market for the superfluous portion of the supply, is equally powerful to depress it.”
Chapter II. Influence Of The Progress Of Industry And Population On Rents, Profits, And Wages.
§ 1. Characteristic features of industrial Progress.
Continuing the inquiry into the nature of the economical changes taking place in a society which is in a state of industrial progress, we shall next consider what is the effect of that progress on the distribution of the produce among the various classes who share in it. We may confine our attention to the system of distribution which is the most complex, and which virtually includes all others—that in which the produce of manufactures is shared between two classes, laborers and capitalists, and the produce of agriculture among three, laborers, capitalists, and landlords.
The characteristic features of what is commonly meant by industrial progress resolve themselves mainly into three, increase of capital, increase of population, and improvements in production; understanding the last expression, in its widest sense, to include the process of procuring commodities from a distance, as well as that of producing them. It will be convenient to set out by considering each of the three causes, as operating separately; after which we can suppose them combined in any manner we think fit.(298) § 2. First two cases, Population and Capital increasing, the arts of production stationary.
For the sake of clearness we will form two general groups of these causes: A. _The Influence of Population and Capital_ (_Improvements remaining stationary_).
B. _The Influence of Improvements_ (_Population and Capital remaining stationary_).
We will first take up A, and under this division make for convenience two separate suppositions: I. The first is that, while Population is advancing, Capital is stationary. By this means we can study separately the operation of one of the factors of societary progress, Population, and see its influence on rents, profits, and wages. There being only the same given quantity of wealth in the form of capital to be now distributed among more laborers (1), real wages must fall; whereupon, if the same capital purchases more labor, and obtains more produce (2), profits rise. Now, if the laborers were so well off before as to suffer the reduction of wages to take place not in their food, but in their other comforts, then, if each laborer uses as much food as before, and if, as by the supposition, there are more laborers, an increased quantity of food will be required from the soil. This supply can be produced only at a greater cost, and, as inferior soils are called into cultivation (3), rents will rise. This last action (3), however, will have an influence on the rise of profits (2). For it was only by a reduction of real wages that profits rose; but if the cost of food, that is, the real wages, have since risen, then one of the elements entering into cost of labor has risen, and in so far will offset the fall of real wages; so that profits will not gain so much as if rents had not risen. The result of this first supposition, then, is, that the landlord is the chief gainer: I. (1.) Wages fall.
(2.) Profits rise (less if rents rise).
(3.) Rents rise.
II. We will now take up the second supposition under A, that while Capital is advancing Population remains stationary. Then, of course (1), wages will rise; and, as there is no improvement to cheapen the cost of their real wages, there will be an increase in cost of labor to the capitalist, and (2) profits will fall. If, now, the laborers, being better off, demand more food, the new food would cost more, as the margin of cultivation was pushed down, and (3) rents would inevitably rise. But not only have the laborers received more real wages, but since that change the cost, as just described, of these real wages has increased. Therefore (2), profits would fall still more than by the rise of real wages.
In this supposition, consequently, while the laborer gains, so does the landlord: II. (1.) Wages rise.
(2.) Profits fall (more if rents rise).
(3.) Rents rise.
A. It is easy for us now to take into our view the total effects under A, and see what the combined action of I and II would be.
That is, if both Capital and Population (improvements remaining stationary) increase, what will be the effect on Wages, Profits, and Rent? Of course, we must suppose that Capital and Population just keep pace with each other; and in that case (1) real wages remain the same, each laborer receiving the same quantity and same quality of commodities as before. Hence, if each laborer receives the same quantity as before, and there are many more laborers, there will be an increased demand put upon the soil for food, poorer soils will be cultivated, and the cost of the products will rise. So (3) rents rise. But if each laborer receives the same quantity of real wages as before, and the cost of them has risen, as just explained, an increased cost of labor will result which must come out of profits. (2) Profits will fall. So that the results of A upon distribution, taken separately from B, are that the owner of capital loses; but the owner of land again gains.
A. (1.) Wages the same.
(2.) Profits fall.
(3.) Rents rise.
§ 3. The arts of production advancing, capital and population stationary.
Now, let us go back to our first general group of causes, B—an advance in the arts of production (while capital and population remain stationary). We can now study by themselves the effect of improvements on wages, profits, and rent. The general effects arising from the extended introduction of machinery into agriculture and manufactures, the lowered cost of transportation by steam, have been to lessen the value of articles consumed chiefly by the laboring-classes. For the sake of clearness, imagine that the improvement comes suddenly. The first effect will be to lower the value and price of articles entering into the real wages of the laborers; and, if those consist mostly of food, there will be a rise in the margin of cultivation and a fall in rents (3). It has been previously shown(299) that improvements retard, or put back, the law of diminishing returns from land (or in manufactures compensate for it), and so lower rents. The poorest soil cultivated is now of a better grade than before, and the produce is yielded at a less cost and value; so that the land with which the best grades are compared, to determine the rent, is not separated from the best grades by so wide a gap. It would at first blush seem, then, that the interests of the landlord were antagonistic to improvements, since they lower rents; but, in practice, it is not so, as we shall soon see.
We have seen that improvements cheapen the price of articles entering into the real wages of the laborer. Having had a given sum as money wages before the change, then, when the sudden change of improvements came, it lowered prices to the laborer, and the same money wages bought more (1) real wages. If nothing more happened, we could see that improvements raised real wages—without lowering (2) profits (because cost of labor remains the same, since the lowered cost of the articles consumed was exactly in proportion to the increase of real wages). And, if the laborers chose to retain this higher standard, this would be the situation.
Sadly enough, however, in practice they are apt to be satisfied with the old standard; and the amount of real wages to give the old standard of living can be had now for less money wages. While only the same number, without any increase, can live at the new (higher) standard, a larger number can live at the old (lower) standard. In short, the obstacles to an increase of population will be removed by the possession of higher money wages. After a generation, it is very probable that a larger number of laborers will be in existence living at the same (or possibly a slightly higher) standard of real wages, and money wages will have fallen.
Now we can understand better than before what would be the practical result of the causes under B. (3.) Rent has fallen; money wages have fallen (even if (2) real wages have not); and, since real wages have not fallen in the proportion that their cost has been reduced, (2) profits will have risen. The general result of the causes under B alone, acting as just described, will then be: B. (1.) Real wages remain the same; money wages less.
(2.) Profits rise.
(3.) Rents fall.
§ 4. Theoretical results, if all three Elements progressive.
We have considered, on the one hand, under A, the manner in which the distribution of the produce into rent, profits, and wages is affected by the ordinary increase of Population and Capital; and on the other, under B, how it is affected by improvements in production, and more especially in agriculture, as follows: A. (1.) Wages the same. B. (1.) Real wages the same, money wages less.
A. (2.) Profits fall. B. (2.) Profits rise.
A. (3.) Rents rise. B. (3.) Rents fall.
The effects are clearly contrasted. Under A, we see a tendency to a rise of rents (3), an increased cost of labor, and a fall of profits (2); under B, a fall of rents (3), a diminished cost of labor, and a rise of profits (2). We have, therefore, analyzed the forces belonging to the progress of industry, and found two distinct and antagonistic forces, working against each other. If, at any period, improvements (B) advance faster than population and capital (A), rent and money wages will tend downward and profits upward. If, on the other hand, population advances faster than improvements (B) either the laborers will submit to a reduction in the quantity or quality of their food, or, if not, rent and money wages will progressively rise, and profits will fall.
§ 5. Practical Results.
This, however, is not the final and practical result. We have hitherto supposed that improvements, B, come suddenly. In point of fact, agricultural skill is slowly diffused, and inventions and discoveries are, in general, only occasional, not continuous in their action, as is the increase of capital and population.
Inasmuch as it seldom happens that improvement has so much the start of population and capital as actually to lower rent, or raise the rate of profits, population almost everywhere “treads close on the heels of agricultural improvement,” and effaces its effects as fast as they are produced.
The reason why agricultural improvement seldom lowers rent is, that it seldom cheapens food, but only prevents it from growing dearer; and seldom, if ever, throws land out of cultivation, but only enables worse and worse land to be taken in for the supply of an increasing demand. What is sometimes called the natural state of a country which is but half cultivated, namely, that the land is highly productive, and food obtained in great abundance by little labor, is only true of unoccupied countries colonized by a civilized people. In the United States the worst land in cultivation is of a high quality (except sometimes in the immediate vicinity of markets or means of conveyance, where a bad quality is compensated by a good situation); and even if no further improvements were made in agriculture or locomotion, cultivation would have many steps yet to descend, before the increase of population and capital would be brought to a stand; but in Europe five hundred years ago, though so thinly peopled in comparison to the present population, it is probable that the worst land under the plow was, from the rude state of agriculture, quite as unproductive as the worst land now cultivated, and that cultivation had approached as near to the ultimate limit of profitable tillage in those times as in the present. What the agricultural improvements since made have really done is, by increasing the capacity of production of land in general, to enable tillage to extend downward to a much worse natural quality of land than the worst which at that time would have admitted of cultivation by a capitalist for profit; thus rendering a much greater increase of capital and population possible, and removing always a little and a little further off the barrier which restrains them; population meanwhile always pressing so hard against the barrier that there is never any visible margin left for it to seize, every inch of ground made vacant for it by improvement being at once filled up by its advancing columns.
Agricultural improvement may thus be considered to be not so much a counter-force conflicting with increase of population as a partial relaxation of the bonds which confine that increase.
Now, since improvements enable a much poorer quality of land to be ultimately cultivated, under the constant pressure of the increase of population and capital, improvements enable rent (3) in the end to rise gradually to a much higher limit than it could otherwise have attained.
If a great agricultural improvement were suddenly introduced, it might throw back rent for a considerable space, leaving it to regain its lost ground by the progress of population and capital, and afterward to go on further. But taking place, as such improvement always does, very gradually, it causes no retrograde movement of either rent or cultivation; it merely enables the one to go on rising, and the other extending, long after they must otherwise have stopped.
Inasmuch as, in point of fact, B never gets the start of A, but follows along with A, the general result will be that which we found true under A—a rise of rents (3), and increased cost of labor to the capitalist, arising from an increased cost of laborers’ subsistence and a fall of profits (2). The effect of a more rapid advance of improvements, at any one time, will temporarily better the condition of the laborers and also raise profits; but, if it is followed immediately by an increase of population, the land-owners will reap the benefits of the improvement in the rise of rent. The final result, then, is as follows: (1.) Real wages, probably higher.
(2.) Profits fall.
(3.) Rents rise.
It is possible that a different combination from the above may sometimes occur in the causes which underlie the progress of society: (1.) There may be a period in which capital is increasing more rapidly than population, and when there seems to be an era of industrial improvements also. Then both wages and profits will be high, and it will be a period of general satisfaction. (2.) If capital goes on increasing, but improvements are few, wages will rise; but profits must suffer a fall. In this country, where population has not yet increased so as to press seriously against subsistence, and where capital increases with incredible swiftness, these cases are often exemplified. The extraordinary resources of the newer States have permitted an unlimited increase of population, and capital has found no difficulty in finding an investment. But yet those States which have been burdened with the disabilities of the old slave _régime_ are far behind the others.
The changes in the rank of the States, in respect of population, at each decade, as seen in Chart No. XVI, are suggestive.
Chart XVI. _Changes of the Rank of the States in the Scale of Relative Population, from 1790 to 1880._ Chapter III. Of The Tendency Of Profits To A Minimum.
§ 1. Different Theories as to the fall of Profits.
The tendency of profits to fall as society advances, which has been brought to notice in the preceding chapter, was early recognized by writers on industry and commerce; but, the laws which govern profits not being then understood, the phenomenon was ascribed to a wrong cause. Adam Smith considered profits to be determined by what he called the competition of capital. In Adam Smith’s opinion, the manner in which the competition of capital lowers profits is by lowering prices; that being usually the mode in which an increased investment of capital in any particular trade lowers the profits of that trade. But, if this was his meaning, he overlooked the circumstance that the fall of price, which, if confined to one commodity, really does lower the profits of the producer, ceases to have that effect as soon as it extends to all commodities; because, when all things have fallen, nothing has really fallen, except nominally; and, even computed in money, the expenses of every producer have diminished as much as his returns. Unless, indeed, labor be the one commodity which has not fallen in money price, when all other things have: if so, what has really taken place is a rise of wages; and it is that, and not the fall of prices, which has lowered the profits of capital. There is another thing which escaped the notice of Adam Smith; that the supposed universal fall of prices, through increased competition of capitals, is a thing which can not take place. Prices are not determined by the competition of the sellers only, but also by that of the buyers; by demand as well as supply. The demand which affects money prices consists of all the money in the hands of the community destined to be laid out in commodities; and, as long as the proportion of this to the commodities is not diminished, there is no fall of general prices. Now, howsoever capital may increase, and give rise to an increased production of commodities, a full share of the capital will be drawn to the business of producing or importing money, and the quantity of money will be augmented in an equal ratio with the quantity of commodities. For, if this were not the case, and if money, therefore, were, as the theory supposes, perpetually acquiring increased purchasing power, those who produced or imported it would obtain constantly increasing profits; and this could not happen without attracting labor and capital to that occupation from other employments. If a general fall of prices and increased value of money were really to occur, it could only be as a consequence of increased cost of production, from the gradual exhaustion of the mines.
It is not tenable, therefore, in theory, that the increase of capital produces, or tends to produce, a general decline of money prices. Neither is it true that any general decline of prices, as capital increased, has manifested itself in fact. The only things observed to fall in price with the progress of society are those in which there have been improvements in production, greater than have taken place in the production of the precious metals; as, for example, all spun and woven fabrics. Other things, again, instead of falling, have risen in price, because their cost of production, compared with that of gold and silver, has increased. Among these are all kinds of food, comparison being made with a much earlier period of history. The doctrine, therefore, that competition of capital lowers profits by lowering prices, is incorrect in fact, as well as unsound in principle.
Mr. Wakefield, in his Commentary on Adam Smith, and his important writings on Colonization, takes a much clearer view of the subject, and arrives, through a substantially correct series of deductions, at practical conclusions which appear to me just and important. Mr. Wakefield’s explanation of the fall of profits is briefly this: Production is limited not solely by the quantity of capital and of labor, but also by the extent of the “field of employment.” The field of employment for capital is twofold: the land of the country, and the capacity of foreign markets to take its manufactured commodities. On a limited extent of land, only a limited quantity of capital can find employment at a profit. As the quantity of capital approaches this limit, profit falls; when the limit is attained, profit is annihilated, and can only be restored through an extension of the field of employment, either by the acquisition of fertile land, or by opening new markets in foreign countries, from which food and materials can be purchased with the products of domestic capital.(300) § 2. What determines the minimum rate of Profit?
There is at every time and place some particular rate of profit which is the lowest that will induce the people of that country and time to accumulate savings, and to employ those savings productively. This minimum rate of profit varies according to circumstances. It depends on two elements: One is the strength of the effective desire of accumulation; the comparative estimate, made by the people of that place and era, of future interests when weighed against present. This element chiefly affects the inclination to save. The other element, which affects not so much the willingness to save as the disposition to employ savings productively, is the degree of security of capital engaged in industrial operations. In employing any funds which a person may possess as capital on his own account, or in lending it to others to be so employed, there is always some additional risk over and above that incurred by keeping it idle in his own custody. This extra risk is great in proportion as the general state of society is insecure: it may be equivalent to twenty, thirty, or fifty per cent, or to no more than one or two; something however, it must always be; and for this the expectation of profit must be sufficient to compensate.
There would be adequate motives for a certain amount of saving, even if capital yielded no profit. There would be an inducement to lay by in good times a provision for bad; to reserve something for sickness and infirmity, or as a means of leisure and independence in the latter part of life, or a help to children in the outset of it. Savings, however, which have only these ends in view, have not much tendency to increase the amount of capital permanently in existence. The savings by which an addition is made to the national capital usually emanate from the desire of persons to improve what is termed their condition in life, or to make a provision for children or others, independent of their exertions. Now, to the strength of these inclinations it makes a very material difference how much of the desired object can be effected by a given amount and duration of self-denial; which again depends on the rate of profit. And there is in every country some rate of profit below which persons in general will not find sufficient motive to save for the mere purpose of growing richer, or of leaving others better off than themselves. Any accumulation, therefore, by which the general capital is increased, requires as its necessary condition a certain rate of profit—a rate which an average person will deem to be an equivalent for abstinence, with the addition of a sufficient insurance against risk.
I have already observed that this minimum rate of profit, less than which is not consistent with the further increase of capital, is lower in some states of society than in others; and I may add that the kind of social progress characteristic of our present civilization tends to diminish it: (1.) In the first place, one of the acknowledged effects of that progress is an increase of general security. Destruction by wars and spoliation by private or public violence are less and less to be apprehended. The risks attending the investment of savings in productive employment require, therefore, a smaller rate of profit to compensate for them than was required a century ago, and will hereafter require less than at present.
(2.) In the second place, it is also one of the consequences of civilization that mankind become less the slaves of the moment, and more habituated to carry their desires and purposes forward into a distant future. This increase of providence is a natural result of the increased assurance with which futurity can be looked forward to; and is, besides, favored by most of the influences which an industrial life exercises over the passions and inclinations of human nature. In proportion as life has fewer vicissitudes, as habits become more fixed, and great prizes are less and less to be hoped for by any other means than long perseverance, mankind become more willing to sacrifice present indulgence for future objects. But, though the minimum rate of profit is liable to vary, and though to specify exactly what it is would at any given time be impossible, such a minimum always exists; and, whether it be high or low, when once it is reached, no further increase of capital can for the present take place. The country has then attained what is known to political economists under the name of the stationary state.
§ 3. In old and opulent countries, profits habitually near to the minimum.
We now arrive at the fundamental proposition which this chapter is intended to inculcate. When a country has long possessed a large production, and a large net income to make savings from, and when, therefore, the means have long existed of making a great annual addition to capital (the country not having, like America, a large reserve of fertile land still unused), it is one of the characteristics of such a country that the rate of profit is habitually within, as it were, a hand’s breadth of the minimum, and the country, therefore, on the very verge of the stationary state. My meaning is, that it would require but a short time to reduce profits to the minimum, if capital continued to increase at