BOOK VI. VALUE, OR DISTRIBUTION AND EXCHANGE. CHAPTER I. PRELIMINARY SURVEY OF DISTRIBUTION AND EXCHANGE. § 1. THE simplest account of the causes which determine the supply of labour and capital is that given by the French economists who just pre The Physiocrats. ceded Adam Smith, and it is based upon the peculiar circumstances of France in the latter half of last century. The taxes, and other exactions levied from the French peasant, were then limited only by his ability to pay; and few of the labouring classes were far from starvation. So the Economists or Physiocrats, as they were called, assumed for the sake of simplicity, that there was a natural law of population according to which the wages of labour were kept at starvation limit. And they assumed, again for the sake of simplicity, that there was something like a natural, or necessary rate of profit, corresponding in some measure to the natural rate of wages; that if the current rate exceeded this necessary level, capital would grow rapidly, till it forced down the rate of profit to that level; and that, if the current rate went below that level, capital would shrink quickly, and the rate would be forced upwards again. Wages and profits being thus fixed by natural laws, they thought that the natural value of every thing was determined simply as the sum of wages and profits required to remunerate the producers. Adam Smith. Adam Smith saw also that labour and capital were not at the verge of starvation in England, as they were in France. In England the wages of a great part of the working classes were sufficient to allow much more than the mere necessaries of existence; and capital had too rich and safe a field of employment there to be likely to go out of existence, or to emigrate. He even insists that the liberal reward of labour "increases the industry of the common people;" that "a plentiful subsistence increases the bodily strength of the labourer; and the comfortable hope of bettering his condition, and of ending his days perhaps in ease and plenty, animates him to exert that strength to the utmost. Where wages are high, accordingly, we shall always find the workman more active, diligent and expeditious, than where they are low; in England, for example, than in Scotland; in the neighbourhood of great towns than in remote country places." Ricardo. Malthus again, in his admirable survey of the course of wages in England from the thirteenth to the Malthus and eighteenth centuries, showed how their mean level oscillated from century to century, falling sometimes down to about half a peck of corn a day, and rising sometimes up to a peck and a half or even, in the fifteenth century, to about two pecks: a height beyond which they have never passed except in our own day; and he observed that " inferior mode of living may be a cause as well as a consequence of poverty." an It must however be admitted that neither Adam Smith nor Malthus laid sufficient stress on the influence which habits of living exercise on the efficiency, and therefore on the earning power of the labourer; and that they sometimes fell back into careless ways of speaking which seemed to imply that the mean level of the wages of labour are fixed by an iron law at the bare necessaries of life. And Ricardo was even more careless in this respect1. J. S. Mill. J. S. Mill carried further the good work of Adam Smith and Malthus. And the economists of our own generation, led in this respect by General Walker and other Americans, have begun to make a careful study of the effects that high wages have in increasing the efficiency not only of those who receive them, but also of their children and grand-children; and have shown that highly paid labour is generally efficient and therefore not dear labour. § 2. Turning next to the side of demand, we may call to mind the common sayings of every day life, that every thing tends to find its own level," that implied in the "most men earn just about what they are worth," The Law of common say ing that in business everything finds its own level. and "if one man can earn twice as much as another, that shows that his work is worth twice as much," that "machinery will displace manual labour whenever it can do the work cheaper." 1 It is true, indeed, that he said distinctly:-"It is not to be understood that the natural price of labour estimated in food and necessaries is absolutely fixed and constant...It essentially depends on the habits and customs of the people." But, having said this once, he did not take the trouble to repeat it constantly; and most of his readers forgot that he ever said it. In the course of his argument he frequently adopted a mode of speaking similar to that of the Physiocrats; and seemed to imply that the tendency of population to increase rapidly as soon as wages rise above the bare necessaries of life, causes wages to be fixed by "a natural law" to the level of these bare necessaries. This law has been called, especially in Germany, Ricardo's "iron" or "brazen" law: many German Socialists believe that this law is in operation now, and will continue to be so, as long as the plan on which production is organized remains". capitalistic" or "individualistic;" and they claim Ricardo as an authority on their side. Ricardo however was fully aware that the necessary or natural limit of wages was fixed by no iron law, but is determined by the local conditions and habits of each place and time; and was keenly sensitive to the importance of a higher "standard of living." It is however true that he was not able to foresee the great rise in the standard of living of the working classes which a generation more fortunate than his own was to see, and that he did not sufficiently recognize that the poverty of the poor was a chief cause of their weakness and therefore of their poverty. (See above Book 1. Ch. IV. § 3,) These are really informal and not strictly accurate ways of putting special cases of the Law of Substitution'. For if there are two methods of obtaining the same result, one by skilled and the other by unskilled labour, that one will be adopted which is the more efficient in proportion to its cost. There will be a margin on which either will be indifferently applied, and on that margin the efficiency of each will be in proportion to its cost. Again, there will be a rivalry between hand-power and machine-power similar to that between two different kinds of hand-power or two different kinds of machine-power. Thus hand-power has the advantage for some operations, as, for instance, for weeding out valuable crops that have an irregular growth; horse-power in its turn has a clear advantage for weeding an ordinary turnip-field; and the application of each of them will be pushed till any further use of it would bring no net advantage. On the margin of indifference as between hand-power and horse-power their prices must be proportionate to their efficiency; and thus the Law of Substitution will have established a direct relation between the wages of labour and the price that has to be paid for horse-power. General theory of wages on the supposition that each grade of labour has its own stand ard of comfort, § 3. Let us now revert to the position in which the theory of value was left by the Physiocrats. Their argument takes no account of the existence of more than one grade of labour; but it will lose little of its simplicity and clearness of outline, if we suppose that society is divided into a number of horizontal grades, each of which is recruited which is rigidfrom the children of its own members; and each of which has its own standard of comfort, and increases in numbers rapidly when the earnings to be got in it rise above, and shrinks rapidly when they fall below that standard. Let us suppose, then, that parents can bring up their children to any trade in 2 See Book IV. Ch. VI. § 5. 1 See above Book v. Ch. III. § 3. ly fixed. their own grade, but cannot easily raise them above it and will not consent to sink them below it. And let us continue to suppose that changes in the methods of production and in the relative proportions of its various branches are not very rapid; so that the supply of the various factors of production required in any trade, whether they be human agents or material appliances, can always be adjusted pretty closely to the demand for them. On these suppositions the normal wage in any trade is that which is sufficient to enable a labourer, who has normal regularity of employment, to support himself and a family of normal size according to the standard of comfort that is normal in the grade to which his trade belongs; it is not dependent on demand except to this extent, that if there were no demand for the labour of the trade at that wage the trade would not exist. In other words the normal wage represents the expenses of production of the labour according to the ruling standard of comfort, and is a fixed quantity so long as that standard is fixed; the influence of demand is only to determine the number of those who are brought into the trade, and not their rate of wages. Let us retain for the present the assumption made by the Physiocrats that there is a natural rate of interest to which the supply of capital steadily and quickly adjusts itself, increasing rapidly whenever the rate of interest is above this level and shrinking again whenever it falls below this level. The tendency of every one to select the best means for attaining his own ends (or, in more technical phrase, the operation of the Law of Substitution), acting gradually but constantly under almost stationary conditions would then have caused each several kind of labour or machinery, or other agent of production to be used for each several purpose until its further use was no longer remunerative; each branch of production would have been extended until it so far satiated the wants which it was directed to meet, that no |