LECTURE IV.

OF THE LOGICAL METHOD OF POLITICAL

ECONOMY (Continued).

§ 1. I CONCLUDED my last lecture by remarking that the method of investigation which-guided by the nature of the evidence available in economic inquiry, as well as by the analogy of the physical sciences, so far as this is pertinent-we found proper for Political Economy, is also the method which has in fact been followed, whether formally avowed or not, by those writers who have contributed most effectually to the progress of economic knowledge. The course taken by these thinkers may, in general, be thus described. Those principles of the science which require no proof, depending directly upon consciousness, as, for example, the desire to obtain wealth at the least sacrifice, they have in general, silently assumed, proceeding at once to argue on them without formally stating them. Those which are liable to dispute, such as the physical properties of productive agents, and the physiological character of human beings in relation to their capacity of

increase, they have established by such evidence as is suitable. The celebrated essay of Malthus on Population, e.g., is almost wholly devoted to the establishment and illustration of the two latter principles-viz. the capacity of human beings to multiply their species, and the capacity of the earth under assumed conditions of agricultural skill to yield subsistence. The foundations of the primary principles being thus laid, they have proceeded to consider the consequences which result in the production and distribution of wealth; how these principles, coming into action under the guidance of human intelligence, lead naturally to the division of labour, to the mutual interchange of products amongst the different producers, to the use of money as a medium of exchange, and, as communities advance, to the rise of rent, and the slower progress of population. They have proceeded then to trace the general laws of value, of rent, of profits, and of wages, which result from the operation of the same principles. But the conclusions thus arrived at being frequently found to differ in various degrees from the observed facts, their attention has thus been drawn (in strict conformity with the order which I have described) to the influence of subordinate principles in modifying the force of the more powerful causes. Thus, the chapter of Adam Smith on the different rates of wages in different employments is wholly an inquiry into the nature and force of such secondary principles. The chapter of Ricardo on 'Foreign trade,' and those of Mr. Mill on International values,' are inquiries of a

similar character; the object being to discover those special causes which, in the case of international exchanges, intervene to modify the general laws of value. Again, Mr. Senior's essay 'On the cost of obtaining Money' is an example of the same kind.

But perhaps the best example which has yet been furnished of the proper use of statistics in the advancement of economic science is afforded by Mr. Tooke in his well-known History of Prices.' One of the first and most elementary principles in the theory of money is that, ceteris paribus, the value of money is inversely as its quantity. In the discussions which took place during the earlier part of the present century on the phenomena of prices and the circulation, this principle was assumed as true, not simply hypothetically, i.e. in the absence of disturbing causes, but as representing the sole, or at least principal, cause regulating general prices. By the ultra-bullionists on the one hand, and by the advocates of an inconvertible currency on the other, it was alike taken for granted that all fluctuations in the prices of commodities are to be attributed, at least in a principal degree, to alterations in the amount of money, including under that term coin and banknotes.1

Now the result of Mr. Tooke's elaborate

1 To such an extent did this delusion prevail, that the celebrated Bullion Committee of 1810, in its admirable though not faultless report, finding that the note circulation had at that time increased in amount, and concluding from other considerations that it was excessive, took it for granted, without inquiry, that 'the prices of all commodities had risen.' (Report p. 11.) I say, without inquiry, 1st, because no witnesses with reference to this point were examined; and 2nd, because, had they inquired, it is certain they would have found the facts to be

examination of the commercial and monetary history of that period was to show that no such correspondence between prices and the circulation, as these different authorities assumed, was in fact to be found. Here, then, was an example of that discrepancy between the conclusions of abstract reasoning and actual phenomena, which it is the business of statistical investigation to bring to light. The inevitable inference, therefore, was, either that the logical process by which these conclusions had been established was unsound, or that some cause influencing the phenomena had been overlooked.' Mr. Tooke showed that a mistake in both these respects had been committed; 1st, a mistake of reasoning which failed to discriminate between the character of money (properly so called)2 in its effect upon prices, and that

precisely the reverse of what they had assumed; the reaction consequent upon the excessive speculation of 1809 and 1810 having then taken place, and the general markets being in a state of extraordinary depression. Vide Tooke's History of Prices,' vol. i., chap. 5, section 2. Mr. Huskisson, in his 'Question, &c., stated,' also makes the same assumption.

1 It is not to be supposed that the discrepancy alluded to goes the length of invalidating the elementary law that, ceteris paribus, the value of money is inversely as its quantity. This still rests upon the same basis of mental and physical facts as every other doctrine of Political Economy, and must always constitute a fundamental principle in the theory of money. It merely showed that in the practical case the condition ceteris paribus was not fulfilled. The fact in question is no more inconsistent with the economic law, than the non-correspondence of a complex mechanical phenomenon with what a knowledge of the elementary laws of mechanics might lead a tyro to expect, is inconsistent with these elementary laws. A guinea dropped through the air from a height falls to the ground more quickly than a feather; yet no one would on this account deny the doctrine that the accelerating power of gravity is the same for all bodies.

? See Tooke's 'History of Prices,' vol. iv., chap, 2, section 2,

of convertible notes issued by banks in the discount of bills; and 2nd, a mistake in overlooking the disturbing influence which other forms of credit, equally with bank notes, when employed as purchasing power, exercise upon prices. The further investigation of this question by Mr. Tooke has resulted in a theory of prices, which, as regards the connection between prices and the note circulation, directly reverses some of the former maxims ;-asserting, for example, that the amount of the note circulation, instead of being the efficient cause which determines the general level of prices, is itself an effect of this phenomenon, the fluctuations in which do not follow but precede the fluctuations in the circulation;—and, in addition, affording for the first time an explanation of a large and important class of monetary phenomena.

Such, then, is the method of inquiry in Political Economy, which not only the nature of the case suggests, but which analogy and authority alike support.

§ 2. In order to illustrate more clearly the character of this method, and the assistance which a clear apprehension of it may afford in discussing economic questions, I shall now take a particular example of an economic law, and examine the nature of the assertion which it contains, and the kind of proof by which it may be established or refuted.

It is a very fundamental law in Political Economy that 'cost of production regulates the value of freely produced commodities.' By the 'cost of production?