Chapter 24

Capital pre-supposes wage-labour, and wage-labour pre-supposes capital. One is a necessary condition to the existence of the other. The two mutually call each other into existence. Does an operative in a cotton-factory produce nothing but cotton goods? No, he produces capital. He produces values that give fresh command over his labour, and that, by means of such command, create fresh values.

Every individual capital is a larger or smaller concentration of means of production, with a corresponding command over a larger or smaller labour-army. Every accumulation becomes the means of new accumulation. The growth of social capital is affected by the growth of many individual capitals.

With the accumulation of capital, therefore, the number of capitalists grows to a greater or less extent. Two points characterise this kind of concentration which grows directly out of, or rather is identical with, accumulation. First, the increasing concentration of the social means of production in the hands of individual capitalists is, other things remaining equal, limited by the degree of increase of social wealth. Secondly, the part of social capital domiciled in each particular sphere of production is divided among many capitalists who face one another as independent commodity-producers competing with each other.

Accumulation and the concentration accompanying it are, therefore, not only scattered, but the increase of each functioning capital is thwarted by the formation of new and the subdivision of old capitals. Accumulation, therefore, presents itself on the one hand as increasing concentration of the means of production and of the command over labour; on the other, as repulsion of many individual capitalists one from another.

JOHN STUART MILL

Principles of Political Economy

John Stuart Mill, the eldest son of the philosopher, James Mill, was born in London on May 20, 1806. His early education was remarkable. At the age of fourteen he had an extensive knowledge of Greek, Latin, and mathematics, and had begun to study logic and political economy. In 1823 he received an appointment at the India Office, and in the same year he became a member of a small Utilitarian society which met at Jeremy Bentham's house, and soon became the leader of the Utilitarian school. Mill's great work on the "Principles of Political Economy," with some of their "Applications to Social Philosophy," embodies the results of many years of study, disputation and thought. It is built upon foundations laid by Ricardo and Malthus, and has itself formed the basis of all subsequent work in England. Throughout, it manifests a belief in the possibility of great social improvement to be achieved upon individualistic lines. It was begun late in 1845, and superseded a contemplated work to be called "Ethnology." Mill's extensive familiarity with the problems of political economy enabled him to compose the work with rapidity unusual in his production. Thus, before the end of 1847, the last sheet of the manuscript was in the hands of the printer, and early in the following year the treatise was published. Mill died at Avignon on May 8, 1873.

_I.--The Production of Wealth_

In every department of human affairs, practice long precedes science. The conception, accordingly, of political economy as a branch of science is extremely modern; but the subject with which its inquiries are conversant--wealth--has, in all ages, constituted one of the chief practical interests of mankind. Everyone has a notion, sufficiently correct for common purposes, of what is meant by "wealth." Money, being the instrument of an important public and private purpose, is rightly regarded as wealth; but everything else which serves any human purpose, and which nature does not supply gratuitously, is wealth also. Wealth may be defined as all useful or agreeable things which possess exchangeable value.

The production of wealth--the extraction of the instruments of human subsistence and enjoyment from the materials of the globe--is evidently not an arbitrary thing. It has its necessary conditions.

The requisites of production are two--labour and appropriate natural objects. Labour is either bodily or mental. Of the other requisite it is to be remarked that the objects supplied by nature are, except in a few unimportant cases, only instrumental to human wants after having undergone some transformations by human exertion.

Nature does more, however, than supply materials; she also supplies powers. Of natural powers, some are practically unlimited, others limited in quantity, and much of the economy of society depends on the limited quantity in which some of the most important natural agents exist, and more particularly land. As soon as there is not so much of a natural agent to be had as would be used if it could be obtained for the asking, the ownership or use of it acquires an exchangeable value. Where there is more land wanted for cultivation than a place possesses of a certain quality and advantages of situation, land of that quality and situation may be sold for a price, or let for an annual rent.

Labour employed on external nature in modes subservient to production is employed either directly, or indirectly, in previous or concomitant operations designed to facilitate, perhaps essential to the possibilities of, the actual production. One of the modes in which labour is employed indirectly requires particular notice, namely, when it is employed in producing subsistence to maintain the labourers while they are engaged in the production. This previous employment of labour is an indispensable condition to every productive operation. In order to raise any product there are needed labour, tools, and materials, and food to feed the labourers. But the tools and materials can be remunerated only from the product when obtained. The food, on the contrary, is intrinsically useful, and the labour expended in producing it, and recompensed by it, needs not to be remunerated over again from the produce of the subsequent labour which it has fed.

The claim to remuneration founded on the possession of food is remuneration for abstinence, not for labour. If a person has a store of food, he has it in his power to consume it himself in idleness. If, instead, he gives it to productive labourers to support them during their work, he can claim a remuneration from the produce. He will, in fact, expect his advance of food to come back to him with an increase, called, in the language of business, a profit.

Thus, there is necessary to productive operations, besides labour and natural agents, a stock, previously accumulated, of the products of labour. This accumulated stock is termed capital. Capital is frequently supposed to be synonymous with money, but money can afford no assistance to production. To do this it must be exchanged for other things capable of contributing to production. What capital does for production is to afford the shelter, tools, and materials which the work requires, and to feed and otherwise maintain the labourers during the process. Whatever things are destined for this use are capital. That industry is limited by capital is self-evident. There can be no more industry than is supplied with materials to work up and food to eat. Nevertheless, it is often forgotten that the people of a country are maintained and have their wants supplied, not by the produce of present labour, but of past, and it long continued to be believed that laws and governments, without creating capital, could create industry.

All capital is the result of saving. Somebody must have produced it, and forborne to consume it, or it is the result of an excess of production over consumption. Although saved, and the result of saving, it is nevertheless consumed--exchanged partly for tools which are worn out by use, partly for materials destroyed in the using, and by consumption of the ultimate product; and, finally, paid in wages to productive labourers who consume it for their daily wants. The greater part, in value, of the wealth now existing in England has been produced by human hands within the last twelve months. A very small proportion, indeed, was in existence ten years ago. The land subsists, and is almost the only thing that subsists. Capital is kept in existence, not by preservation, but by perpetual reproduction.

_II.--The Distribution of Wealth_

The laws and conditions of the production of wealth partake of the character of physical truths. There is nothing optional or arbitrary about them. It is not so with the distribution of wealth. That is a matter of human institution solely.

Among the different modes of distributing the produce of land and labour which have been adopted, attention is first claimed by the primary institution on which the economical arrangements of society have always rested--private property.

The institution of property consists in the recognition, in each person, of a right to the exclusive disposal of the fruits of their own labour and abstinence, and implies the right of the possessor of the fruits of previous labour to what has been produced by others by the co-operation between present labour and those fruits of past labour--that is, the freedom of acquiring by contract.

We now proceed to the hypothesis of a threefold division of the produce, among labourers, landlords, and capitalists, beginning with the subject of wages.

Wages depend mainly upon the demand and supply of labour, or, roughly, on the proportion between population and capital. It is a common saying that wages are high when trade is good. Capital which was lying idle is brought into complete efficiency, and wages, in the particular occupation concerned, rise. But this is but a temporary fluctuation, and nothing can permanently alter _general_ wages except an increase or diminution of capital itself compared with the quantity of labour offering itself to be hired.

Again, high prices can only raise wages if the producers and dealers, receiving more, are induced to add to their capital or, at least, to their purchases of labour. But high prices of this sort, if they benefit one class of labourers, can only do so at the expense of others, since all other people, by paying those high prices, have their purchasing power reduced by an equal degree.

Another common opinion, which is only partially true, is that wages vary with the price of food, rising when it rises and falling when it falls. In times of scarcity, people generally compete more violently for employment, and lower the labour market against themselves. But dearness or cheapness of food, when of a permanent character, may affect wages. If food grows permanently dearer without a rise of wages, a greater number of children will prematurely die, and thus wages will ultimately be higher; but only because the number of people will be smaller than if food had remained cheap. Certain rare circumstances excepted, high wages imply restraints on population.

As the wages of the labourer are the remuneration of labour, so the profits of the capitalist are properly the remuneration of abstinence. They are what he gains by forbearing to consume his capital for his own uses and allowing it to be consumed by productive labourers for their uses. Of these gains, however, a part only is properly an equivalent for the use of the capital itself; namely, so much as a solvent person would be willing to pay for the loan of it. This, as everybody knows, is called interest. What a person expects to gain who superintends the employment of his own capital is always more than this. The rate of profit greatly exceeds the rate of interest. The surplus is partly compensation for risk and partly remuneration for the devotion of his time and labour. Thus, the three parts into which profit may be regarded as resolving itself, may be described, respectively, as interest, insurance, and wages of superintendence.

The requisites of production being labour, capital, and natural agents, the only person besides the labourer and the capitalist whose consent is necessary to production is he who possesses exclusive power over some natural agent. The land is the principal natural agent capable of being so appropriated, and the consideration paid for its use is called rent.

It is at once evident that rent is the effect of a monopoly. If all the land of the country belonged to one person he could fix the rent at his pleasure. The whole people would be dependent on his will for the necessaries of life. But even when monopolised--in the sense of being limited in quantity--land will command a price only if it exists in less quantity than the demand, and no land ever pays rent unless, in point of fertility and situation, it belongs to those superior kinds which exist in less quantity than the demand.

Any land yields just so much more than the ordinary profits of stock as it yields more than what is returned by the worst land in cultivation. The surplus is what is paid as rent to the landlord. The standard of rent, therefore, is the excess of the produce of any land beyond what would be returned to the same capital if employed on the worst land in cultivation, or, generally, in the least advantageous circumstances.

_III.--Of Exchange and Value_

Of the two great departments of political economy, the production of wealth and its distribution, value has to do with the latter alone. The conditions and laws of production would be unaltered if the arrangements of society did not depend on, or admit of, exchange.

Value always means in political economy value in exchange, the command which its possession gives over purchasable commodities in general; whereas, by the price of a thing is understood its value in money.

That a thing may have value in exchange two conditions are necessary. It must be of some use--that is, it must conduce to some purpose, and secondly, there must be some difficulty in its attainment. This difficulty is of three kinds. It may consist in an absolute limitation of supply, as in the case of wines which can be grown only in peculiar circumstances of soil, climate, and exposure; in the labour and expense requisite to produce the commodity; or, thirdly, the limitation of the quantity which can be produced at a given cost, to which class agricultural produce belongs, increased production beyond a certain limit entailing increased cost.

When the production of a commodity is the effect of labour and expenditure, there is a minimum value, which is the essential condition of its permanent production, and must be sufficient to repay the cost of production, and, besides, the ordinary expectation of profit. This may be called the _necessary_ value. When the commodity can be made in indefinite quantity, this necessary value is also the maximum which the producers can expect. If it is such that it brings a rate of profit higher than is customary, capital rushes in to share in this extra gain, and, by increasing the supply, reduces the value. Accordingly, by the operation of supply and demand the values of things are made to conform in the long run to the cost of production.

The introduction of money does not interfere with the operation of any of the laws of value. Things which by barter would exchange for one another will, if sold for money, sell for an equal amount of it, and so will exchange for one another, still through the process of exchanging them will consist of two operations instead of one. Money is a commodity, and its value is determined like that of other commodities, temporarily by demand and supply and permanently by cost of production.

Credit, as a substitute for money, is but a transfer of capital from hand to hand, generally from persons unable to employ it to hands more competent to employ it efficiently in production. Credit is not a productive power in itself, though without it the productive powers already existing could not be brought into complete employment.

In international trade we find that the law that permanent value is proportioned to cost of production does not hold good between commodities produced in distant places as it does in those produced in adjacent places.

Between distant places, and especially between different countries, profits may continue different, because persons do not usually remove themselves or their capital to a distant place without a very strong motive. If capital removed to remote parts of the world as readily, and for as small an inducement, as it moves to another quarter of the same town, profits would be equivalent all over the world, and all things would be produced in the places where the same labour and capital would produce them in greatest quantity and of best quality. A tendency may even now be observed towards such a state of things; capital is becoming more and more cosmopolitan.

It is not a difference in the _absolute_ cost of production which determines the interchange between distant places, but a difference in the _comparative_ cost. We may often by trading with foreigners obtain their commodities at a smaller expense of labour and capital than they cost to the foreigners themselves. The bargain is advantageous to the foreigner because the commodity which he receives in exchange, though it has cost us less, would probably have cost him more.

The value of a commodity brought from a distant place does not depend on the cost of production in the place from whence it comes, but on the cost of its acquisition in that place; which in the case of an imported article means the cost of production of the thing which is exported to pay for it. In other words, the values of foreign commodities depend on the terms of international exchange, which, in turn, depend on supply and demand.

It may be established that when two countries trade together in two commodities the exchange value of these commodities relatively to each other will adjust itself to the inclinations and circumstances of the consumers on both sides in such manner that the quantities required by each country of the article which it imports from its neighbour shall be exactly sufficient to pay for one another, a law which holds of any greater number of commodities. International values depend also on the means of production available in each country for the supply of foreign markets, but the practical result is little affected thereby.

_IV.--On the Influence of Government_

One of the most disputed questions in political science and in practical statesmanship relates to the proper limits of the functions and agency of governments. It may be agreed that they fall into two classes: functions which are either inseparable from the idea of government or are exercised habitually by all governments; and those respecting which it has been considered questionable whether governments should exercise them or not. The former may be termed the _necessary_, the latter the _optional_, functions of government.

It may readily be shown that the admitted functions of government embrace a much wider field than can easily be included within the ring-fence of any restrictive definition, and that it is hardly possible to find any ground of justification common to them all, except the comprehensive one of general expediency; nor to limit the interference of government by any universal rule, save the simple and vague one that it should never be admitted but when the case of expediency is strong.

A most important consideration in viewing the economical effects arising from performance of necessary government functions is the means adopted by government to raise the revenue which is the condition of their existence.

The qualities desirable in a system of taxation have been embodied by Adam Smith in four maxims or principles, which may be said to have become classical:

(1) The subjects of every state ought to contribute to the support of the government as nearly as possible in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.

(2) The tax which each individual has to pay ought to be certain, and not arbitrary. A great degree of inequality is not nearly so great an evil as a small degree of uncertainty.

(3) Every tax ought to be levied at the time or in the manner in which it is most likely to be convenient for the contributor to pay it. Taxes upon such consumable goods as are articles of luxury are all finally paid by the consumer, and generally in a manner that is very convenient to him.

(4) Every tax ought to be so contrived as to take out and keep out of the pockets of the people as little as possible over and above what it brings into the public treasury.

Taxes on commodities may be considered in the following way. Suppose that a commodity is capable of being made by two different processes. It is the interest of the community that of the two methods producers should adopt that which produces the best article at the lowest price. Suppose, however, that a tax is laid on one of the processes, and no tax at all, or one of lesser amount, on the other. If the tax falls, as it is, of course, intended to do, upon the process which the producers would have adopted, it creates an artificial motive for preferring the untaxed process though the inferior of the two. If, therefore, it has any effect at all it causes the commodity to be produced of worse quality, or at a greater expense of labour; it causes so much of the labour of the community to be wasted, and the capital employed in supporting and remunerating the labour to be expended as uselessly as if it were spent in hiring men to dig holes and fill them up again. The loss falls on the consumers, though the capital of the country is also eventually diminished by the diminution of their means of saving, and in some degree of their inducements to save.

Taxes on foreign trade are of two kinds: taxes on imports and on exports. On the first aspect of the matter it would seem that both these taxes are paid by the consumers of the commodity. The true state of the case, however, is much more complicated.

By taxing exports we may draw into our coffers, at the expense of foreigners, not only the whole tax, but more than the tax; in other cases we shall gain exactly the tax; in others less than the tax. In this last case, a part of the tax is borne by ourselves, possibly the whole, even more than the whole.

If the imposition of the tax does not diminish the demand it will leave the trade exactly as it was before. We shall import as much and export as much; the whole of the tax will be paid out of our own pockets.

But the imposition of a tax almost always diminishes the demand more or less. It may therefore be laid down as a principle that a tax on imported commodities, when it really operates as a tax, and not as a prohibition, either total or partial, almost always falls in part upon the foreigners who consume our goods. It is not, however, on the person from whom we buy, but on those who buy from us that a portion of our custom duties spontaneously falls. It is the foreign consumer of our exported commodities who is obliged to pay a higher price for them because we maintain revenue duties on foreign goods.

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We now reach the consideration of the grounds and limits of the principle of _laisser-faire,_ or non-interference by government.