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The necessity of taxation-Adam Smith's four canons of tax-
ation–The utility of bonding houses-Taxes on raw materials
- Direct taxation on manufactured commodities impracticable
-Cost of collection—The incidence of taxation-Direct and
indirect taxation–The income-tax-Taxes on commodities
should be as far as possible confined to luxuries—The inci-
dence of all taxes levied on land falls on the owner of the
land— The land-tax_Tithes—Poor-rates—The incidence of
poor-rates levied on dwelling-houses and on trade premises.
Political Economy is the science which investigates the nature of wealth, and the laws which govern its Production, Exchange and Distribution.
As wealth is the subject of political economy it is necessary to understand precisely what wealth is.
Wealth is anything which has an exchange value. This definition will be readily understood if the student recalls some things which, however useful and indispensable, cannot be considered wealth. Thus, the air we breathe has no exchange value ; no one will exchange anything for any quantity of air, because every one can freely and without any labour obtain as much air as he requires. In the same way the light of the sun has no exchange value. In many places water has no exchange value. Water, however, acquires an exchange value in all places where the natural supply is insufficient to meet the wants of the inhabitants. In large towns, for instance, water is supplied by means of canals and aqueducts, and in this case it has an exchange value, and may consequently be regarded as wealth.
Many most mischievous errors have been fallen into by persons who have mistaken the true nature of wealth. Formerly it was almost universally considered that
“wealth” and “money" were synonymous terms. Acting on this belief, the wealth of a country was estimated by the amount of gold and silver it contained ; and artificial restraints were placed upon commerce, with the view of preventing the precious metals from being sent out of the country. There are many excuses for the persons who made the mistake of confounding money and wealth. Like many others they mistook the sign for the thing signified. Wealth is always estimated in money. The income of a rich man is said to be so many thousand pounds; the national revenue and the national expenditure are said to be so many million pounds.!
These and hundreds of similar facts caused the true nature of money to be misunderstood. The best way of arriving at a trustworthy conclusion respecting it is to look back into history, and see what other nations have done who have not made use of gold and silver coin. The money of the Chinese once consisted of small cubes of pressed tea; there are certain tribes of Indians who use a sort of shell as money ; and Adam Smith tells us of some Arabs who used cattle for the same purpose ; they sell into the same error as those who thought that wealth was the same thing as money, for they thought that no country could be wealthy that did not possess vast herds of cattle. When they first heard of France and wished to form an idea of its wealth, they asked how many cattle it contained. There have been times in the history of every country when the use of money, even of a rude description, was unknown ; all exchange then had to be carried on by means of barter.
Thus if a man who had two boats were in need of a spear, he would offer a boat in exchange to anyone who would give him a spear. Though commerce could not flourish under such a system of exchange as this, yet it is idle to assert that these barbarous communities pos
sessed no wealth, for we previously explained that wealth was anything that had an exchange value.
The real nature of Money. What then is money? It is a measure of value, and a medium of exchange. When it is said that money is a measure of value, it is virtually affirmed that any substance is money which is selected by universal consent to serve as a standard by which the value of all other commodities may be estimated. That this substance need not be gold or silver has been shewn above ; in fact any article might be selected to serve as a measure of value.
The meaning of the assertion that money is a medium of exchange is that all other substances may be readily exchanged for money.
The mercantile system. The error of identifying wealth with money led to the policy briefly alluded to above, of doing everything to foster the accumulation of gold and silver. With this end in view statesmen did all they could to encourage the export trade of their own country, and to discourage importations from abroad by placing heavy duties on imported goods, and by giving bounties on exports. At the time when this policy was prevalent in England, very large duties were placed upon French wine, brandy, silks, lace, etc., with the object of preventing large quantities of these commodities being bought in England ; for this, it was argued, would decrease England's wealth by causing money to be sent from England to France. The fallacies of this policy, which is known as the Mercantile System, were first exposed by Adam Smith in his great book The Wealth of Nations, which was published in 1776. In this work he pointed out the errors of a book, called England's Treasure in Foreign Trade, which was the guide of the statesman who carried out the Mercantile System. The object of this book actually was to shew that home trade was of little consequence, because it did not increase the amount of gold and silver in the country. Adam Smith's work explained, for the first time in England, the true nature of money, and shewed that if all restrictive duties were discontinued the exports and imports of a country would tend to be equal.
Free Trade. This part of our subject will be more fully explained in a subsequent chapter ; at present it is only necessary to add that the policy of removing restrictive duties on imports and allowing commerce to take its natural course is known as the Free Trade Policy.
With these few introductory remarks we pass to the consideration of the first of the three great branches into which our subject is divided : viz. the Production of Wealth.
QUESTIONS ON THE INTRODUCTORY CHAPTER. 1. What is Political Economy?
What is Wealth? 3. What is Money ?
4. Enumerate some of the articles which have at various times been used as Money.
5. What is Barter?
8. By whom and how were the errors of the Mercantile System first combated ?
9. By what Policy has the Mercantile System been superseded?
Could a man be said to be wealthy, if he had not sixpence in the world?
Was the Spartan nation poorer because it prohibited gold?
3. Is barter quite extinct in England ?