CHAPTER IV ECONOMIC THOUGHTS

Transcription

1 Photo IV-0-1. The Enlightenment and Economics in the Eighteenth Century Source: CHAPTER IV ECONOMIC THOUGHTS Pre-Classical Economic Thought 315 Richard Cantillon, Francois Quesnay, Anne Turgot David Hume, James Steuart 2. Adam Smith: Classical Capitalism 341 Adam Smith, Jean-Baptiste Say 3. Ricardo and Malthus: Neo-Classical Capitalism 375 Thomas Robert Malthus, David Ricardo 4. Other Intellectual Developments 391 Writings on History, Literature and Art, Classical Music Education, Scientific Advance, Medicine (Please click each line to see the first page of contents) Book IV. The French Revolution and the Industrial Revolution,

2 Map IV-0-1. Colonial Trade Routes in the Eighteenth Century Source: Pre-Classical Economics: Physiocracy Francois Quesnay, Jacques Turgot; David Hume, James Steuart Francis Hutcheson Classical Economics Adam Smith J. B. Say Bernard de Mandeville Thomas Malthus Neo-Classical Economics David Ricardo Wm. Nassau Senior John Stuart Mill John E. Cames Utilitarianism Jeremy Bentham James Mill Figure IV-0-1. Classical Economics Source: Ingrid Hahne Rima, Development of Economic Analysis (New York: Routledge, 1996), 64 (Modified) 312 Book IV. The French Revolution and the Industrial Revolution,

3 CHAPTER IV. ECONOMIC THOUGHT AND OTHER INTELLECTUAL DEVELOPMENT FROM 1715 TO 1815 The Renaissance in Italy realized the dignity of man and the worldliness of human nature. In the sixteenth century, Martin Luther divided the Christianity into Protestant and Catholic through the religious reformation. Spain created a new empire by discovery of new lands and the expansion of colonies with their naval powers sided with Portugal, followed by the Netherlands, England, and France; and their mercantilism controlled foreign trade and exchange rates for their national interests. In the seventeenth century, Louis IV strengthened the foundation of the absolute dynasty in France, and England achieved the Glorious Revolution by passing the Bill of Rights by the Parliament in 1688, not by the king. Meanwhile, Isaac Newton synthesized rationalism with empiricism in scientific studies; John Locke wrote a contract theory of the people with the government in politics, and William Petty argued that civil laws against natural laws would be vain and fruitless, and that government intervention would not be beneficial in the economy. Such developments provided a bright and progressive background for the rise of capitalism. First, the enlightenment favored reason and pursued natural rights: Voltaire criticized the oppression of absolute regime, the lack of religious toleration and of freedom of thoughts; and J. J. Rousseau wrote on social contract focusing on general will for the common good of the community. It provided an ideological basis for the revolutions, and liberal political thoughts helped undisturbed market activities. Second, while political thoughts were liberalized, Adam Smith justified profit motive in ethics, introduced laissez faire in the market, and advocated capital investment for productivity growth; that stimulated the rise of capitalism. Third, the Industrial Revolution was accompanied by intensive factor mobilization with old technology and productivity growth with new technology; and the expansion of production required exports of finished goods and imports of raw materials; which expedited international trade and stimulated the rise of capitalism. Moreover, the recognition of private property and profit-motivated activities are essential for the rise of capitalism. Plato sees that the ruling class is corrupted if they acquire a taste for money and possessions, and suggests that the best political community should share everything as common property, and the citizens should not accumulate wealth in the form of money. 1 But Aristotle believes that private property is more highly productive, gives more pleasure to the owner, and provides them more virtues of temperance and liberality than communal property. 2 Nevertheless, Christian Bible disapproves wealth by treating it with hostility. Saint Augustine views that private property is responsible for various evils such as dissension, war, and injustice though he admits that it belongs to human right rather than divine right. 3 Thomas Aquinas establishes private property under the law of nature: Common ownership and universal freedom are by nature right because private property and slavery are not arrangement of nature but human contrivances for the good running of society. 4 He justifies profits from mercantile activities in terms of self-support, charity, and public service; but considers that unlimited profits from trade are dishonorable: the just price is the value of goods where the amount of labor embodied, from which civil law allows the trading price with reasonable deviation. Despite church s prohibition of usury (intrinsic title), Aquinas compromises the traditional doctrine with economic reality by allowing interest of loans which covers suffered damage, escaped gains, default, and business risk (extrinsic titles). 5 John Locke views private property as a natural right that exists ahead of government, 6 but Rousseau denounces private property as a source of all evils of civilization. 7 Finally, Adam Smith clearly defined the issues on private property and profit motive in trade and investment: private property belongs to untouchable natural rights and profit motive in economic transactions does not or at least not necessarily undermine the public interest. Book IV. The French Revolution and the Industrial Revolution,

4 In production, the mobilization of input factors is essential for the rise of capitalism. First, Smith views that individual savings provide a new source of capital investment, which requires additional labor with advanced technology. As a result, the economy produces more output with less cost, which improves social welfare as a whole. The banking system with full-fledged credit facilities is essential to supply capital for investment. The acquired capital should be efficiently allocated with the provision of proper infrastructure for industrial expansion. Second, additional quantity of labor is supplied by population growth, released labor from agriculture and war, and foreign labor. The specialized quality of labor is supplied by education and training, that require enough time and money in terms of human capital. Third, the advancement of science and technology contributes to the rise of capitalism. Even a small case of invention or renovation can provide an opportunity or a turning point of industrial progress. The mobilization of input factors with existing technology and the growth of productivity with new technology expand industrial output dramatically. When Smith published the Wealth of Nations in 1776, he never recognized that technological advancement would change the industrial world so rapidly. But when Ricardo wrote his Principles in 1817, Britain had experienced the Industrial Revolution; hence, he could develop his theory based on Smith s book with economic reality of the time: specialization in production and free trade with comparative advantage. The specialization combines labor and capital efficiently, that expedites mass productions in each country, expands the production possibility frontier of the world, and diffuses benefits of gains from trade. The specialization with comparative advantage of factor endowment for trade partners was Ricardo s outstanding contribution to the theory of international economics. In consumption, the rise of capitalism requires sufficient demand generation. The rapid growth of population in Europe in the eighteenth century generated additional demand for food, clothing, housing, and others, while the agricultural revolution in Britain generated surplus to purchase manufacturing products. The expansion of foreign markets such as America, Africa, and Asia became an important source of demand generation for European countries. According to Say, supply creates demand: if the supply is restricted, the demand will be restricted in general. Say views that the balance between supply and demand is an adjustment process of the economy in the short or long run. However, Malthus is against Say s Law of Markets in two ways: rising population increases unemployment and rising investment reduces purchasing power. Malthus emphasizes an optimum propensity to consume: an adequate and effective consumption creates demand for products. If the supply side is constantly prepared, domestic and foreign demand for its products must be an essential element to reach an equilibrium position. In the market, the undisturbed and fair competition is important for the rise of capitalism. Smith suggests that the principle of laissez faire is guided by invisible hand. Either government intervention or monopoly in the market distorts resource allocation by creating bottlenecks and idle capacities, which reduces economic efficiency and diminishes individual welfare as a whole. Smith views that political freedom is unable to prosper without economic freedom. In the international market, the adjustment of domestic currency to the price change of foreign currencies is a necessary process in trade. In fact, as soon as an exporter receives a bill of exchange, the bill should be sold in the foreign exchange market. Ricardo concerned that the exchange price of domestic currency to this foreign currency decides the profit margin, which is essential to continue foreign trade. If the price of domestic currency is too low, the profit of exports will decline though the volume of exports may rise. If the price of domestic currency is too high, the opposite would be true. Thus, an adequate level of domestic and foreign demand by Malthus, undisturbed competition in the market by Smith, and fair prices of foreign exchanges by Ricardo formed significant theories and practices for the rise of capitalism in the eighteenth century. 314 Book IV. The French Revolution and the Industrial Revolution,

5 1. Pre-Classical Economic Thought From the sixteenth to the eighteenth century, mercantilism was dominant in trade policy and economic doctrine; securing export monopoly, exchange control, and the balance of trade by imposing high tariffs especially on manufactured goods. In addition, other policies have included forbidding colonies to trade with other nations; monopolizing markets with staple ports; banning the export of gold and silver, even for payments; forbidding trade to be carried in foreign ships; subsidies on exports; promoting manufacturing through research or direct subsidies; limiting wages; maximizing the use of domestic resources; and restricting domestic consumption through non-tariff barriers to trade. 8 Its trends appeared in early modern Venice, Genoa, and Pisa, controlling the Mediterranean trade of bullion. In England, businessmen, merchants, and government officials like Thomas Mun ( ), Gerard de Malynes, and Edward Misselden wrote mercantilist treatises. In France, Jean-Baptiste Colbert ( ) worked to ensure that the French East India Company had access to foreign markets by pursuing mercantilist policies. The mercantilist doctrine has been interpreted in history as follows. Frist, the mercantilist writers confused money with wealth: gold and silver are indeed the measure of trade. Charles Davenant and Josiah Child argued that net inflow of money was a barometer that signaled whether a nation won or lost in its trade with other countries, which proved to be folly. Secondly, mercantilism was interpreted as the theory and practice of state-making a reflection of modern state bureaucracy and its interests. Mercantilist writers to find means and ways to enrich the nation, emphasizing how increased wealth is a precondition for a strong and militarily powerful state. But mercantilism has often been regarded as an excuse for protective policies by the state. Thirdly, the English mercantile writers supported a favorable balance of trade because they saw an advantage in higher prices. The doctrine of the favorable balance of trade was the idea of the need to have more money in circulation in the time of the shortage of money that would curtail economic growth. Fourthly, the idea of a specific mercantilist central theory in modern sense has been rejected by scholars, but it has been hard to root out. They thought that the export of more manufactured goods would lead to an increase in England s income. The profit would stem from the importers not only paying England for its raw materials, but also for its labor costs. This is distinctively different from the bullionist idea of an inflow of money making the country rich. 9 Mercantilist idea can be traced in modern forms of protectionism: a protectionist school emerged with the late mercantilists such as James Steuart, who wrote the Principles of Political Economy in As discussed in my Book III (pages 503-6), the decisive impulse towards political arithmetic was inspired by some economists. William Petty ( ) dealt with problems of taxation, of money, of the policy of international trade particularly with a view to getting the better of the Dutch, and so on. He stimulated statistical studies in English and attempted to measure the relative wealth and income of England, France, and Holland to see the real conditions of the English people. Charles Davenant ( ) suggests that export surplus is indispensable to finance war, and that the population growth is beneficial for the state because its high density will provide an incentive to industry with invention. Gregory King ( ) estimated the population and wealth of England, and provided the statistical summary for the king in Daniel Bernoulli ( ), a Swiss mathematician, applied the calculus for the measurement of the marginal utility of wealth or income. On the other hand, there appeared liberal economic thought. John Child ( ) opposed to monopolistic restrictions of trade, which are harmful to the interest of the state. John Locke ( ) was against a high interest rate that raises the production cost, which reduces its demand, so does the trade volume. In the quantity theory of money, he sees the importance of money velocity. His theories supported economic liberalism. 10 Book IV. The French Revolution and the Industrial Revolution,

6 Photo IV-1-1. An Imaginary Seaport with a transposed Villa Medici at the height of mercantilism, painted by Calude Lorrain around Photo IV-1-2. The Montagu Family at Sandleford Priory (Berkshire), 1744 Source: Book IV. The French Revolution and the Industrial Revolution,

7 Richard Cantillon (1680s-1734) was an Irish-French economist and author of an Essay on the Nature of Trade in General, a book considered by William Stanley Jevons (d. 1882) to be the cradle of political economy. Although little information exists on Cantillon's life, it is known that he became a successful banker and merchant at an early age. His success was largely derived from the political and business connections he made through his family and through an early employer, James Brydges. During the late 1710s and early 1720s, Cantillon speculated in, and later helped fund, John Law's Mississippi Company from which he acquired great wealth (see pages in my Book III). However, his success came at a cost to his debtors, who pursued him with lawsuits, criminal charges, and even murder plots until his death in Essay remains Cantillon's only surviving contribution to economics. It was written around 1730 and circulated widely in manuscript form, but was not published until His work was translated into Spanish probably in the late 1770s, and considered essential reading for political economy. Despite having much influence on the early development of the physiocrat and classical schools of thought, Essay was largely forgotten until its rediscovery by Jevons Cantillon was influenced by his experiences as a banker, and especially by the speculative bubble of John Law's Mississippi Company. He was also heavily influenced by prior economists, especially William Petty. Essay is considered the first complete treatise on economics, with numerous contributions to the science. These contributions include: his cause and effect methodology, monetary theories, his conception of the entrepreneur as a risk-bearer, and the development of spatial economics. Cantillon's Essay had significant influence on the early development of political economy, including the works of Adam Smith, Anne Turgot, Jean-Baptiste Say, Frédéric Bastiat and François Quesnay. 11 His Essay of the Nature of Trade in General consists of three parts to be discussed below. PART I attempts to prove that the real value of everything used by man is proportion-able to the quantity of land used for its production and for the upkeep of those who have fashioned it. (i) The land is the source or matter from whence all wealth is produced. The labor of man is the form which produces it: and wealth in itself is nothing but the maintenance, conveniences, and superfluities of life. To all this the labor of man gives the form of wealth. (ii) Human societies: Even if the Prince distribute the land equally among all the inhabitants, it will ultimately be divided among a small number If however we suppose that the land belongs to no one in particular, it is not easy to conceive how a society of men can be formed there if the land were left to the first occupier in a new conquest or discovery of a country, it would always be necessary to fall back upon a law to settle ownership in order to establish a society, whether the law rested upon force or upon policy. (iv) Market towns: Prices are fixed by the proportion between the produce exposed for sale and the money offered for it; this takes place in the same spot, under the eyes of all the villagers of different villages and of the merchants or undertakers of the town. When the prices had been settled between a few the others follow without difficulty and so the market-price of the day is determined. The peasant goes back to his village and resumes his work. (vii) The Labor of the husbandman is of less value than that of the handicrafts-man. (viii) Some Handcrafts-man earn more, others less, according to the different cases and circumstances. (ix) The Number of laborers, handicraftsmen and others, who work in a state is naturally proportioned to the demand for them: It often happens that laborers and handicraftsmen have not enough employment when these are too many of them to share the business. (x) The Price and intrinsic value of a thing in general is the measure of the land and labor which enter into its production: The quantity of the produce of the land and the quantity as well as the quality of the labor will of necessity enter into the price. (xi) The Par or Relation between the value of land and labor: the value of the day s work has a relation to the produce of the soil, and the intrinsic value of anything may be measured by the quantity of land used in its production and the quantity of labor which enters into it. 12 Book IV. The French Revolution and the Industrial Revolution,

8 (xii) All Classes and Individuals in a state subsist or are enriched at the expense of the proprietors of land: The farmers have generally two thirds of the produce of the land, one for their costs and the support of their assistants, the other for the profit of their undertaking: on these two third the farmer provides generally directly or indirectly subsistence for all those who live in the country, and also several mechanics or undertakers in the city in respect of the merchandise of the city consumed in the country. The proprietor has usually one third of the produce of his land and on this third he maintains all the mechanics and others whom he employs in the city as well, frequently, as the carriers who bring the produce of the country to the city. (xiii) The Circulation and exchange of goods and merchandise as well as their production are carried on in Europe by undertakers and at a risk: The proprietors of land alone are naturally independent in a state; and all the other classes are dependent whether undertakers or hired, and all the exchange and circulation of the state is conducted by the medium of these undertakers. (xiv) The Fancies, the Fashions and the modes of living of the prince, and especially of the landowners, determine the use to which land is put in a state and cause the variations in the market-prices of all things. 13 (xv) The Increase and decrease of the number of people in a state chiefly depend on the taste, the fashions, and modes of living of the proprietors of land: It is not to be doubted that if all land were devoted to the simple sustenance of man, the race would increase up to the number that the land would support in the manner to be explained. The natural and consistent way of increasing population in a state is to find employment for the people there, and to make the land serve for the population of their means of support. (xvi) The more labor there is in a state, the more naturally rich the state is esteemed: The point which seems to determine the comparative greatness of states is their reserve stock above the yearly consumption, like magazines of cloth, linen, corn, etc. to answer in bad year or war. And as gold and silver can always buy these things, even from the enemies of the state, gold and silver are the true reserve stock of a state, and the larger or smaller actual quantity of this stock necessarily determines the comparative greatness of kingdoms and states. (xvii) Metals and money: The market value of metals, as of other merchandise or produce, is sometimes above, sometimes below, the intrinsic value, and varies with their plenty or scarcity according to the demand. Money or the common measure of value must correspond in terms of land and labor to the articles exchanged for it. Gold and silver, like other merchandise and raw produce, can only be produced at costs roughly proportion-able to the value set upon them, and whatever man produces by labor, this labor must furnish his maintenance. 14 PART II deals with market prices, money and its circulation, and interest of money. (i) Barter: In a market town where there is twice as much corn as is consumed there, we compared the whole quantity of corn to that of silver, the corn would be more abundant in proportion than the silver destined for its purchase. (ii) Market Prices: It is clear that the quantity of produce or of merchandise offered for sale, in proportion to the demand or number of buyers, is the basis on which is fixed or always supposed to be fixed the actual market prices; and that in general these prices do not vary much from the intrinsic value. (iii) The Circulation of Money: In general in England, a farmer must make three rents: the rent to the proprietor; the cost of production including maintenance of the farm; and undertaking profits. The circulation of money takes place when they make those payments of rents; and is equal in value to two of these rents, or two thirds of the produce of the land, if the farmer pays once a year. (iv) Further reflection on the rapidity or slowness of the circulation of money in exchange: In fine there is so great a variety in the different orders of the inhabitants of the state and in the corresponding circulation of actual money, that it seems impossible to lay down anything precise or exact as to the proportion of money sufficient for the circulation. The actual money necessary for the circulation of the state corresponds nearly to the value of the third of all the actual rents of the landlords Book IV. The French Revolution and the Industrial Revolution,

9 (v) The Inequality of the circulation of hard money in a state: The inequality of the circulation of money in the different states constitutes the inequality of their respective power, other things being equal; and this inequality of circulation is always respective to the balance of foreign trade; which considers the quantity of money and the speed of circulation. (vi) The Increase and decrease in the quantity of hard money in a state: The abundance of money or its increase in exchange, raises the price of everything. The quantity of money brought from America to Europe for the last two centuries justifies this truth by experience. The rapid circulation of money in exchange is equivalent to an increase of actual money up to a point. If the increase of money in the state proceeds from a balance of foreign trade, this annual increase of money will enrich a great number of merchants and undertakers in the state. This will increase the consumption and raise the price of land and labor. (viii) The abundance of money increases consumption and imports of foreign goods, so the state begins to lose some branches of its profitable trade, which reduces the balance of trade surplus. When a state expands by trade and the abundance of money raises the price of land and labor, the prince or the legislator ought to withdraw money from circulation, keep it for emergencies, and try to retard its circulation by every means except compulsion and bad faith, so as to forestall the too great dearness of its articles and prevent the drawbacks of luxury. (ix) Interest of money and its causes: The interest of money in a state is settled by the proportionate number of lenders and borrowers, just as the prices of things are fixed by the quantity of things to the quantity of money. (x) The Causes of interest rate changes: The increased quantity of currency in a state reduces the interest rates, but this idea is not always true or accurate. If the consumer spending rose, the available money to loan declines, so that the opposite would happen. The balance of trade would affect the amount of money to loan, which similarly affect interest rates. The current rate of interest in a state seems to serve as a basis and measure for the purchase price of land. 16 PART III includes foreign trade, finance, and banking. (i) Foreign Trade: It is true that the continued increase of money will at length by tis abundance cause a dearness of land and labor in the state. The goods and manufactures will in the long run cost so much that the foreigner will gradually ceased to buy them, and will accustom himself to get them cheaper elsewhere, and this will by imperceptible degrees ruin the work and manufactures of the state. The same cause which will raise the rents of landlords (which is the abundance of money) will draw them into the habit of importing many articles from foreign countries where they can be had cheap. Such are the natural consequences. The wealth acquired by a state through trade, labor and economy will plunge it gradually into luxury. States who rise by trade do not fail to sink afterwards. There are steps which might be, but are not, taken to arrest this decline. But it is always true than when the state is in actual possession of a balance of trade and abundant money it seems powerful, and it is so in reality so long as this abundance continues. (ii) The Exchanges and their nature: When exchange is regulated between two cities or places where the money is quite different, where the coins are of different size, fineness, make, and names, the nature of exchange seems at first more difficult to explain, though at bottom this exchange differs from that between Paris and Chalons only in the jargon of bankers. At Paris one speaks of the Dutch exchange nu reckoning the ecu of three livres against so many deniers de gros of Holland, but the parity of exchange between Paris and Amsterdam is always 100 ounces of gold or silver against 100 ounces of gold or silver the same weight and fineness. 102 ounces paid at Paris to receive 100 ounces at Amsterdam always comes to 2 percent above par. The banker who effects the remittance of the balance of trade must always know how to calculate parity. But in the language of foreign exchange, the price of exchange at London with Amsterdam is made by giving a pound sterling in London to receive 35 Dutch escalins at the bank: with Paris in giving at London 30 deniers or pence sterling to receive at Paris one ecu or three livres tournois. Bankers know the amount of local currency to receive. 17 Book IV. The French Revolution and the Industrial Revolution,

10 (iii) Further explanation: We have seen that the exchanges are regulated by the intrinsic value at par, and their variation arises from the costs and risks of transport from one place to another when the balance of trade has to be sent in specie. Bankers sometimes introduce refinements into practice. If England gains regularly a balance of trade with Portugal and always loses a balance with Holland, the rates of exchange with Holland and Portugal make speculation: at London the exchange on Lisbon is below par, and Portugal is indebted to England. It will be seen also that the exchange on Amsterdam is above par and that England is indebted to Holland. But the quantity of the debt cannot be seen from the exchanges. It will not be seen whether the balance of silver drawn from Portugal will be greater or less than what has to be sent to Holland. Exchanges rise more or less above par in proportion to the great or small costs and risks of the transport of money and this being granted they naturally rise much more above par in the cities of states where it is forbidden to export money than in those where its export is free. (iv) The variations in the proportion of values with regard to the metals which serve as money: It is the market price which decides the ratio of the value of gold to that of silver, taking the ratio such as at 1 to 15 in England, and 1 to 8 in Japan. If market price varies considerably, that of the coinage must be reformed to follow the market rate. By reducing the value of gold, the value of silver continues to rise in the market. In some centuries, the value of silver rises slowly against gold. (v) The augmentation and diminution of coin in denomination: We often see in the increases and decreases practiced in France such strange variations that it might be supposed that market prices correspond rather to the nominal value of coin than to its quantity in exchange, the quantity of livres tournois in money of account rather than the quantity of marks and ounces, which seems directly opposed to our principles. The change of nominal value of money causes present-day inflation effects. 18 (vi) Banks and their credits: The bankers contribute to accelerate the circulation of money and to prevent so much of it from being hoarded as it would naturally be for several intervals. They lend it out at interest at their own risk and peril, and yet they are or ought to be always ready to cash their notes when desired on demand. (vii) Further explanations and enquiries as to the utility of a National Bank: In 1720 the capital of public stock and of bubbles of private companies at London, rose to the value of 800 million sterling, yet the purchases and sales of such pestilential stocks were carried on without difficulty through the quantity of notes of all kinds which were issued, while the same paper money was accepted in payment of interest. But as soon as the idea of great fortunes induced many individuals to increase their expenses, to buy carriages, foreign linen and silk, cash was needed for all that, I mean for the expenditure of the interest, and this broke up all the systems. In the regular course of circulation, the help of banks and credit of this kind is much smaller and less solid than is generally supposed. Silver alone is the true sinews of circulation. (viii) The refinement of credit of general banks: The national Bank of London is composed of a large number of shareholders who make choice of Directors to govern its operations. Their primitive advantage consisted in making a yearly distribution of the profits made by interest on the money lent out of the bank deposits. Later the public debt was incorporated with it, on which the state pays an annual interest. It is undoubted that a bank with the complicity of a minister is able to raise and support the price of public stock and to lower the rate of interest in the state at the pleasure of this minister when the steps are taken discreetly, and thus pay off the state debt. But these refinements which open the door to making large fortunes are rarely carried out for the sole advantage of the state, and those who take part in them are generally corrupted. The excess banknotes, made and issued on these occasions, do not upset the circulation, because being used for the buying and selling of stock they do not serve for household expenses and are not changed into silver. But if some panic or unforeseen crisis drove the holders to demand silver from the bank, the bomb would burst and it would be seen that these are dangerous operations Book IV. The French Revolution and the Industrial Revolution,

11 Physiocrats and French Pre-Classical Political Economy: From the seventeenth century, a unique combination of forces prepared the way for the new science of political economy. One was the scientific revolution that overturned the ancient categories of physics, astronomy, biology, and mathematics, emphasized observation and experimentation and promoted a congenial climate for the development of new, imaginative hypotheses. The second was the increasing importance of the market economy, colonial trade expansion, and, in the eighteenth century, the beginnings of the technological revolution, first in agriculture and then in industry. The third force at work was the growth of the philosophy of natural law and natural rights, which made the individual s welfare and property the new measuring rod of governmental policy. 20 Economic concepts had been developed and theoretical relationships between them were considered by medieval writers and even ancient Greeks, but economics as a science dealing with a class of data that is not wholly within a province of other fields of knowledge and that is subject to stable and logically consistent laws in short, modern economics began only in the seventeenth and eighteenth centuries. With the rise of individualism, the market economy was creating an economic division by placing the individual in a position of greater dependence upon objective market forces. The natural-law and natural-rights philosophy expressed the individual s political separation from, and even opposition to, the state. This transformation in the way individuals could view their relation to the world made it possible to envisage an objective social science of economic behavior. The new discoveries in the natural and biological sciences fostered a new excitement in intellectual circles both in England and France during this period, and it seemed logical to believe that the marketplace too could be shown to exhibit regularities of behavior that could be expressed by laws; that such laws could be examined and compared; that, in short, a science of economics was feasible. Moreover, science was also leading to many practical inventions; the idea that scientific principles could be applied in useful ways was carried over into economics. 21 Physiocracy (from Greek for Government of Nature) is an economic theory developed by a group of 18th century Enlightenment French economists who believed that the wealth of nations was derived solely from the value of land agriculture or land development and that agricultural products should be highly priced. Their theories originated in France and were most popular during the second half of the 18th century. Physiocracy is perhaps the first well-developed theory of economics. The movement was particularly dominated by François Quesnay and Anne-Robert- Jacques Turgot. It immediately preceded the first modern school, classical economics, which began with the publication of Adam Smith's The Wealth of Nations in The most significant contribution of the Physiocrats was their emphasis on productive work as the source of national wealth. This is in contrast to earlier schools, in particular mercantilism, which often focused on the ruler's wealth, accumulation of gold, or the balance of trade. Whereas, the Mercantilist school of economics said that value in the products of society was created at the point of sale, by the seller exchanging his products for more money than the products had previously been worth, the Physiocratic school of economics was the first to see labor as the sole source of value. However, for the Physiocrats, only agricultural labor created this value in the products of society. All industrial and non-agricultural labor was unproductive appendages to agricultural labor. At the time the Physiocrats were formulating their ideas, economies were almost entirely agrarian. That is presumably why the theory considered only agricultural labor to be valuable. Physiocrats viewed the production of goods and services as consumption of the agricultural surplus, since the main source of power was from human or animal muscle and all energy was derived from the surplus from agricultural production. Profit in capitalist production was really only the rent obtained by the owner of the land on which the agricultural production is taking place. 22 Let s now investigate new economic ideas of Francois Quesnay and Jacques Turgot. Book IV. The French Revolution and the Industrial Revolution,

12 Francois Quesnay ( ), the first Physiocrat, born near Paris, became a doctor of medicine in 1744, subsequently being made physician and eventually the first physician to Louis XV, actually medical advisor to Madame de Pompadour. Coming to economics in his sixties, he defines that physical law as the regulated course of all physical events which is evidently the most advantageous to mankind, and moral law as the rule of every human action conforming to the physical order evidently most advantageous to mankind both which form natural laws. Since natural laws are the best possible laws for mankind, the role of government is minimized such as only to preserve the natural rights of citizens including their property rights; to provide a system of courts for the resolution of disputes; to engage in public works to encourage commerce, such as dredging harbors; and to establish a system of education. He recommended laissez-faire including free trade, and the single tax on the net income from land. Quesnay views that only the primary sector yields a surplus, measured by the difference between the values of input and output in the sector, becoming the typical basis for capital accumulation in agriculture. He believes that the quantities of primary products and their monetary values are essential to evaluate the wealth of a nation, so that it is necessary to improve techniques of cultivation and to assure the products to be sold at the proper prices in the market, which increases productivity and total revenue. Quesnay applied a new structural and quantitative method for economic studies in his Tableau Economique, which was the first input-output table with three sectors of proprietors, farmers, and manufacturers and businessmen. It is a simplified model of economic equilibrium based on the concept of the general interdependence of three sectors to analyze flows of goods and money between sectors. It is a primitive model of an Input-Output present-days. In 1758 he published the Tableau économique, which provided the foundations of the ideas of the Physiocrats. This was perhaps the first work to attempt to describe the workings of the economy in an analytical way, and as such can be viewed as one of the first important contributions to economic thought. The publications in which Quesnay expounded his system were the following: two articles, on Fermiers (Farmers) and on Grains, in the Encyclopédie of Diderot and D'Alembert (1756, 1757); a discourse on the law of nature in the Physiocratie of Dupont de Nemours (1768); Maximes générales de gouvernement economique d'un royaume agricole (1758), and the simultaneously published Tableau économique avec son explication, ou extrait des économies royales de Sully; Dialogue sur le commerce et les travaux des artisans; and other minor pieces. The Tableau économique, though on account of its dryness and abstract form it met with little general favor, may be considered the principal manifesto of the school. It was regarded by the followers of Quesnay as entitled to a place amongst the foremost products of human wisdom, and is named by the elder Mirabeau, in a passage quoted by Adam Smith, as one of the three great inventions which have contributed most to the stability of political societies, the other two being those of writing and of money. Its object was to exhibit by means of certain formulas the way in which the products of agriculture, which is the only source of wealth, would in a state of perfect liberty be distributed among the several classes of the community, and to represent by other formulas the modes of distribution which take place under systems of Governmental restraint and regulation, with the evil results arising to the whole society from different degrees of such violations of the natural order. It follows from Quesnay's theoretic views that the one thing deserving the solicitude of the practical economist and the statesman is the increase of the net product; and he infers also what Smith afterwards affirmed, on not quite the same ground, that the interest of the landowner is strictly and indissolubly connected with the general interest of the society. 23 Quesnay s approach to economics may be divided into three areas: the problem of the French economy, the method of analysis he adopted, and the solutions he suggested. His principal aim was to discover ways in which the wealth of a country could be increased. 322 Book IV. The French Revolution and the Industrial Revolution,

13 (a) Tableau Economique: (i) Problem: There had been an endemic shortage of foodstuffs and famines were a recurring phenomenon; and the population of France had fallen from 24 million to 16 million between 1650 and The nobles and the clergy also suffered from serious financial problems; the revenues from their landed estates decreased sharply during the same period Financial conditions in France had been under severe strain for several decades. In the face of continually rising expenditure on the military as well as on supporting the Court at Versailles, public receipts were permanently inadequate. The fiscal system was inefficient causing huge expenses. By the middle of the eighteenth century, the problem of French finances was worse than it had ever been. In this environment, it comes as no surprise to find that Quesnay s objects of analysis are the mechanism which influence the wealth of the country. He tried to provide a logical apparatus from which to derive useful recommendations for the economic policy of the government, so that the sovereign authority, always guided by what is self-evident, should institute the best laws and cause them to be scrupulously observed, in order to provide for the security of all and to attain to the greatest degree of prosperity possible for the society. (ii) Method: The level of national income per capita is the best indicator of the economic prosperity of the country. Quesnay thought that economic facts should be understood and explained on the basis of specific relationships of cause and effect connecting the actions of individuals, which formulated a general causal model of the economy, which included a definition of wealth and shed light on the causes of its increase according to natural laws. Natural laws are normative rules, but they can be disturbed by men and by the rulers of nations. Quesnay describes the method of abstraction and simplification to build up a general model of the natural order of society. His methodology is an original mixture of rationalism and empiricism: our understanding of society must be based on the fundamental needs of human beings and their attempts to satisfy them. He analyzed social and economic activities on a materialistic basis, reflecting mutual economic interests of men. Quesnay uses several assumptions in his Tableau economics. 1) The primary sector uses the best techniques of production. Large scale cultivation has been extended to all lands, which are exploited by rich farmers, acting as capitalist entrepreneurs. 2) The exploitation of land should be secured against any form of retaliation, from the landlords or from the administration. 3) The existence of free trading conditions, particularly in foreign trade, must be essential for the production of French agriculture. 4) The tableau prices are regarded as constant, which hypothesis defines the limits of the analysis of the Tableau. 5) There is a single tax; that the expenditures of the landlords are one half of their agricultural revenue; and that the sovereign and the Church neither save nor hoard money in any form. (iii) Solutions: It is viewed that wealth and revenue come from agriculture: they identify major cause of the misery and backwardness of France as the decline of its agriculture, so that administrators must implement measures to raise its productivity, yielding a surplus. In this regard, there were three policy recommendations as follows. Frist, the fiscal system and the corn trade: free farmers should be free from several types of taxes which ultimately prevented any planning of production and investment; and free foreign trade should be designed to establish the most favorable market conditions for French primary goods. Second, landlords and all the other classes must avoid buying manufactured goods, mainly from foreign merchants, and shift their pattern of expenditure in favor of the products of French agriculture. Third, the amount of cultivated land must be increased and farmers must use their gains to cooperate with the state in extending cultivation by means of drainage scheme; agricultural entrepreneurs must raise the capital invested in tools and instruments, livestock and hours, and all the items which form part of the equipment required for the efficient cultivation of land; and the increase in such capital should be accompanied by modernization of the methods of cultivation. 24 Book IV. The French Revolution and the Industrial Revolution,

14 (b) Value and Wealth: The amount of agricultural produce is the basis of the prosperity of the people; and the size of agricultural surplus indicates the growth potential of the nation. The abundance of products and their high values are the source of wealth and revenue, so that the country with higher prices is relatively richer and more powerful than the other. In primary commodities, the more they are sold at high prices, the more net product cultivation yields. The technique of cultivation is also essential to improve the conditions of production in agriculture and to ensure that the products will be sold at a proper price. In eighteenth-century France, mercantilist views were already losing ground, while it was believed that the only true wealth of a nation was the number of its inhabitants: people made a country opulent and rich. Quesnay maintained that the quantities of consumable agricultural products, and not money and people, were what could bring prosperity to a country. Since wealth is something that can be exchanged according to the rules of a market economy, a commodity must possess two qualities: the possessors of the good must be able to sell it, and there must be a market for the good to be sold. Quesnay links wealth and revenue directly to the existence of stable and normal prices for the products of land: high and favorable prices like at the first-hand sales are not sufficient to give wealth both to individuals and to countries. Quesnay regarded industry as a true and proper sector of the economy; but It is important to note that in France in the middle of the eighteenth century, many industrial activities were still part of agriculture. These occupations were known as industire rurale, or campagnarde, and were wide spread in several regions of France. Such industry consisted mainly of the production of clothes. All these occupations were actually carried out either by peasant families or by peasants who had become artisans. The latter were still closely linked to agriculture, both because they received from it all the necessaries of life and because farmers were the main buyers of their products. The physiocrats advocates the reduction on primary products and the abolition of all types of fiscal barriers between the provinces of France. 25 (c) The Theory of Prices in Physiocrats - Individualism and laisses-faire: The Physiocrats, believed that self-interest is the motivation for each segment of the economy to play its role. Each individual is best suited to determine what goods he wants and what work would provide him with what he wants out of life. While a person might labor for the benefit of others, he will work harder for his own benefit; however, each person's needs are being supplied by many other people. The system works best when there is a complementary relationship between one person's needs and another person's desires, and trade restrictions place an unnatural barrier to achieving one's goals. Laissez faire was popularized by physiocrats Vincent de Gournay ( ) who is said to have adopted the term from François Quesnay's writings on China. Quesnay distinguishes their use value from their exchange value: the use value of a commodity is only a prerequisite of its exchange value, because it ensures that it can be sold on the market. People who exchange commodities act only in view of their own satisfaction and self-interest, but this fact does not lead to arbitrary values of prices, depending on the reciprocal strength of buyers and sellers. These contrasting forces are checked and regulated by the market. Quesnay believes that, if a market exchange economy is allowed to work according to the laws of the natural order, it reconciles the different interests of the exchangers, because none of them can fix a price according to his own interest. Hence the prices of exchangeable products depends neither on the buyer nor on the seller. Therefore, there are two main forces which influence the prices of commodities: supply and competition. Merchants are the necessary links between farmers and artisans, who produce the commodities, and landlords and other consumers who want to buy them. The interest of traders are opposed to those of the majority of citizens, and their profits must not be accounted for as revenue for the nation. Prices in a market are not necessarily influenced by sudden changes in annual output; but are influenced mainly by the conditions and the rules of trade Book IV. The French Revolution and the Industrial Revolution,

15 Quesnay thanks to the introduction of free foreign trade and international competition that greatly reduces its fluctuations, and the quantity produced each year is rendered less important for the determination of prices in sales at first-hand. Competition becomes the most relevant factor in the process of price formation. In physiocratic analysis, the value of the current price changes continuously, while the prix fondamental is remarkably stable. But these two notions are connected, because Quesnay does not accept the process of price formation is influenced by natural laws, and not by chaos. Therefore the fundamental value of a commodity defines the stable and permanent level of the current price in sales at first-hand since there is free competition in international markets. Quesnay writes: as result of this general intercommunication and these successive and mutual alternations of abundance and scarcity, prices always remain at an intermediate level, determined by the average fundamental price in these countries which are joined together by trade. The level at which the current price finally settles is not the result of the opposing forces of supply and demand, but is regulated by the fundamental price of commodities. This is the most important notion of price introduced by Quesnay, because it provides a benchmark for all the other price concepts used by the physiocrats, and illustrates their view of the value of commodities. Most of pre-physiocratic economists believed that the forces that went under the traditional headings of supply and demand affected the market values of commodities. Cantillon made a sharp distinction between the market price of a commodity and its intrinsic value, which is the measure of the quantity of land and of labor entering into its production, having regard to the fertility or produce of the land and to the quality of the labor. Quesnay defines that the fundamental price includes costs, taille, and rent; while costs consist of wages, raw materials, and consumption of fixed capital. 27 (d) Capital, Competition and the Origin of Surplus: The doctrine of exclusive productivity of agriculture is opposed by two ways: one is that agriculture will give people their subsistence, but only manufacture will bring money and wealth; the other is that industrial production yields a more stable revenue to entrepreneurs and to the country because it is safer than agriculture. But agricultural labor is productive only when it is assisted by the necessary amount of capital: the more advances are made in the primary sector the higher is the productivity of the workers, so only large-scale farming is productive, while the small-scale techniques of production used by the poor can hardly give a surplus. The existence and the size of agricultural surplus depend mainly on the techniques of production of agriculture. The physiocrats believe that the possibility for French manufactures are highly insecure; with laissez-faire they have no hope of making any profit. According to them, the exports of French manufacture are always threatened by completion from foreign industries. There is the possibility that some manufacturers may make a profit, when they are protected by exclusive privileges, which give them the unjust right of selling their products above their natural value. And competition does not have the same effect on the prices of primary commodities. Quesnay and his disciples are convinced that the existence of competitive market conditions for the products of land is compatible with a permanent and stable surplus value over costs. According to them, competition should have the same features in markets for the products of land as in those for manufactured commodities. A high level of consumption of gives rise to strong competition among buyers, which increases the price of foodstuffs. High and stable prices for the products of land are seen as a basic feature of a prosperous nation, but French agriculture is not in such a favorable situation. The physiocrats envisage a type of international free trade, which can make France, economically, and perhaps politically, the most powerful country in the world, to the disadvantage of her trading partners. They tried to justify the exclusive productivity of agriculture with the spheres of productivity and of the market, but weaknesses were observed with the lack of balance in the analysis of market and production phenomena. 28 Book IV. The French Revolution and the Industrial Revolution,

16 (e) The Theory of Distribution: In Grains, Quesnay says that in the cultivation of corn, the net product must be distributed approximately in the following way: for the landlord 3/5; for the taille 1/5; and for the farmer 1/5. The gain is not limited to the cultivation of corn, but arises in all the productive activities of the primary sector. According to Quesnay, in order to see whether the cultivator makes either a profit or a loss, one must examine the fundamental price of corn and the average price that the farmer obtains. A profit accrues to the farmer in so far as the price at which he sells the product exceeds the overall expenses incurred for the production of one unit of output. If the technical costs of production, the rent and the taille are given and fixed, The sum of these three items is the fundamental price, which depends on three sets of data: (i) the methods of production, (ii) the value of rent, and (iii) the value of taxation. The fundamental price is known before the products are sold on the market and does not include profit because it is the price at which the cultivator makes neither losses nor gains. Given the above three sets of data, the size of the profit depends entirely on market conditions in the sales at first-hand. The physiocratic notion of profit has most of the features of profit on alienation whose size is influenced by the selling price of a commodity. Quesnay also speaks of the interests on the advances of the productive class as 10 percent of the original advances of the cultivator. Despite the fact that Quesnay links profits to the advances and expenses of farmers, his analysis of prices and markets clearly shows that he considers the gains of entrepreneurs much more as part of the social surplus than as a necessary cost of production. We can divide the components of social surplus into two elements: profits and revenue, that is to say rent and taille in terms of their expenditure: The landlord purchase goods and services for their own consumption, while the profits of farmers are reinvested in production. Farmers and landlords spend their share of surplus: the features and roles of the two classes are clearly separated in the process of economic development. 29 (f) Physiocracy and the Origin of Political Economy: Quesnay wants to reduce the expenses necessary to maintain the workers; the means of production must replace the peasants in cultivating the soil: it is necessary to increase production and to diminish the expenses, as much as possible, by means of livestock, machines, and all the other means which can replace the expenses. Two major preoccupation guide Quesnay s analysis of the labor process. First, he want to secure the introduction of new machinery and new techniques in agriculture Secondly, the expenses of cultivation must be reduced, to make it possible to reduce the selling price of products, without a reduction either in farmers profits, or in the revenues of the landlords and of the crown. In fact, with lower retail prices more people may consume the products of French agriculture, which, most importantly, become more competitive on international markets. Therefore, overall effective demand for French foodstuffs increases. In defending the doctrine of the exclusive productivity of agriculture, Quesnay had a clear view of the division of labor in society, where each individual has a role to play, though he does not use the idea of division of labor to analyze the labor process, either on land or in factories. The physiocrats also justify the existence of surplus in agriculture by arguing that with free competition in foreign trade, wealthy foreign merchants ensure a high effective demand for the products of land, which causes a high level of competition among buyers and therefore raises current prices. The existence of permanent excess demand justifies and guarantees the existence of a net product. Despite their attacks on mercantilism, Quesnay and his disciples end up by welcoming a positive balance of trade for France even though the net balance must be composed of the products of land. Advantageous foreign trade is still a condition of the phsyocratic process of development and growth. Finally, there are contrasting interests of classes, the interests of farmers and landlords cannot easily be reconciled. Profits are the only sources of capital accumulation in agriculture, and are the most important economic factor in the development of the country Book IV. The French Revolution and the Industrial Revolution,

17 Anne Robert Jacques Turgot ( ) was the best known Physiocrat, next to Quesney. Born in Paris, he was educated for the Church, and after brilliantly sustaining his thesis for the degree of Bachelor of Theology, in 1749 he was admitted to the Maison de Sorbonne, an annex of the theological faculty of the University of Paris, to read for this license. He was soon elected prieur, a largely honorary office which involved presiding over assembly of theological students and delivering on certain occasions a discourse in Latin. In this capacity, Turgot delivered A Philosophical Review of the Successive Advances of the Human Mind, and On Universal History both in Abandoning his ecclesiastic career, he entered the service of the crown in After holding minor posts in the parlement of Paris, in 1761 he was appointed to intendant of the district of Limoges serving with great success until 1774, and continuously served as Minister of the Navy for a few months and as Comptroller-General of Finance during He was a great civil servant devoting to state and society as the economist in action to improve the financial administration: he improved the allotment of taxes, remedied injustices, organized a civil service, freed the trade in grain, abolished the craft guilds, built 450 miles of roads, and persuaded the inhabitants to grow potatoes as human food, which brought great relief during the famine period of in France. Some historians may say that he might have prevented the Revolution by tightening over expenditures of the government. In his occasional visits to Paris, he contracted a friendship with David Hume at the British Embassy during , and became acquainted with Adam Smith in Paris in 1766, when Turgot wrote his Reflections on the Production and the Distribution of Riches for the benefit of two young Chinese students returning to China. (a) A Philosophical Review (1750): Turgot views that the human race like each individual has its infancy and its advancement over the period since its origin. Since the original ideas are based on sensation, the same senses, the same organs, and the spectacle of the same universe give the same ideas. Nevertheless, they do not all move forward at the same rate along the road because circumstances either encourage or discourage its development, and it is the infinite variety of these circumstances which brings about the manifest inequality in the progress of nations. The progress of the human mind alone caused the rise and fall of civilization. Turgot considers two factors in processes. Frist, the general process of the growth and development of societies is a natural process, comparable to the process of growth of the individual from infancy to adulthood, or that of the plant from seed to flower. Second, the main reasons why societies tend in the long run to develop towards greater perfection are to be sought in the economic sphere. In the discourse, Turgot emphasizes in this connection (i) the crucial importance of the emergence in the agricultural stage of development of a social surplus, which not only make possible the development of towns, trade, the useful arts and accomplishments, the division of occupations, etc., but also facilitates the creation of a leisured class which bends all its strength to the cultivation of the arts ; (ii) the way in which the development of commerce is associated with the perfection of astronomy, navigation, and geography; (iii) the important role of the towns the centers of trade and the backbone of society in preventing the decline of the arts and sciences in periods of barbarism; and (iv) the way in which the mechanical arts are preserved in times of general decline by the needs of life, and are developed in the long run merely by virtue of the fact that time passes All these ideas were clarified and developed further in On Universal History, which, together with the companion work On Political Geography, was written by Turgot, while he was at the Sorbonne, or shortly after he left it On Political Geography is interesting not only as further evidence of the extraordinary breath and novelty of the young Turgot s interests and ideas, but also because it contains an important development of the three states theory. Turgot s notes consist essentially of a description of five political maps of the world, the first of which would contain details of the following people who are shepherds, hunters, husbandmen. 32 Book IV. The French Revolution and the Industrial Revolution,

18 (b) On Universal History (1750): Turgot makes a much more extensive use of the three stages theory in it than any of his earlier works. In the beginning, when men could devote themselves to nothing but obtaining their subsistence, they were primarily hunters, in much the same situation as the savages of America. But in countries where certain animals like oxen, sheep, and horses were to be found, the pastoral way of life was introduced, resulting in an increase in wealth and greater understanding of the idea of property. Eventually, in fertile countries, pastoral peoples moved on to the state of agriculture, and as a result of the surplus which agriculture was able to generate there arose towns, trade, and all the useful arts and accomplishments, a leisured class, and so on. Within this conceptual framework, Turgot sets an account of wars and conquests among early peoples, the ways in which different nations were led to intermingle, and the overall effects of this intermingling the development of society is essentially a kind of unintended by-product of the conflict of human wills and actions which are often directed towards quite different ends. The passions of ambitious men, says Turgot, have led them on their way without their being aware of where they were going They were, so to speak, the leading-strings with which nature and its Author guided the human race in its infancy It is only through upheavals and ravages that nations have been extended, and that order and government have in the long run been perfected. Thus the passions have led to the multiplication of ideas, the extension of knowledge, and the perfection of the mind, in the absence of that reason whose day had not yet come and which would have been less powerful if its reign had arrived earlier. 33 Invention of printing spread not only the knowledge of books, but also that of the modern arts, and it has greatly perfected them It was like a new world, in which everything pricked their curiosity. 34 (c) Reflections on the Production and the Distribution of Riches (1766): Schumpeter admired that Turgot s theoretical skeleton is, even irrespective of its priority, distinctly superior to that of the Wealth of Nations. Chapter I XXVIII. Commerce is impossible upon the supposition of an equal division of lands, where in every man should possess only what was necessary for his own support; which hypothesis has never existed and could not have continued. The diversity of soils and the multiplicity of wants lead to the exchange of the products of the land for other products. The products of the land require preparations long and difficult, in order to render them fit to satisfy the wants of man. The necessity of these preparation brings about the exchange of produce for labor. The husbandman is the first mover in the circulation of labor; it is he who causes the land to produce the wages of all the artisans. The wages of the workman are limited to his subsistence by the competition among the workmen. The husbandman is the only person whose labor produces something over and above the wages of the labor; so he is the sole source of all wealth. The society is divided into two classes: the productive class or the cultivators; and stipendiary class or the artisans. In the first ages, the proprietor cannot have been distinguished from the cultivator. All the lands have a master; and the proprietors begin to be able to throw the labor of cultivation upon hired cultivators. Inequality in the division of properties: first, a man of greater strength, more industrious, more anxious about the future, took more of it than a man of a contrary character. He whose family was more numerous, as he had more needs and more hands at his disposal, extended his possessions further. Secondly, all piece of ground are not equally fertile: two men, with the same extent of ground and the same labor, could obtain a very different produce from it. Thirdly, properties, in passing from fathers to children, are divided into portions more or less small, according as the families are more or less numerous. Finally, the contrast between the intelligence, the activity, and above all, the economy of some and the indolence, inaction and dissipation of others would cause inequality. The negligent and improvident proprietor, who cultivates badly, who, in abundant years, consumes the whole of his superfluity in frivolities, finds himself reduced, on the lease accident, to request assistance from his prudent neighbor Book IV. The French Revolution and the Industrial Revolution,

19 As a consequence of this inequality, the cultivator is distinguished from the proprietor. The produce is divided into two parts: the one includes the subsistence and the profits of the husbandman, which are the reward of his labor and the condition upon which he undertakes to cultivate the field of the proprietor. What remains is that independent and disposable part which the land gives as a pure gift to him who cultivates it, over and above his advances and the wages of his trouble; and this is the portion of the proprietor or the revenue, with which the latter can live without labor and which he carries where he will. Then, we have the society divided into three classes: the class of husbandmen or the productive class; the class of artisans and others who receive stipends from the produce of the land; and the class of proprietors, the only one which, not being bound by the need of subsistence to a particular labor, can be employed for the general needs of the society, such as war and the administration of justice, either by a personal service, or by the payment of a part of their revenue with which the state or the society may engage men to discharge these function called disposable class. The labor of the cultivators produces his own wages and the revenue paid to artisans and other stipendiaries; while the artisans receive simply their wages. How the proprietors are able to draw the revenue from their lands: first method is cultivation by men who are paid wages; second is cultivation by salves; third is alienation of the estate in return for a fixed payment of rent; fourth is the metayer system, by giving up to cultivator a fixed portion of the produce, usually a half, the proprietor undertaking to make the advance of cultivation; fifth method is farming or the letting-out of land to farmers, who undertake to make all the advances of the cultivation, and who promise to give the proprietor, during the number of years agreed upon, and unvarying revenue. The two last methods of cultivation are those most generally used, to wit: cultivation by metayers in poor countries, and cultivation by farmers in the richer countries. 36 Chapter XXIX LXXI. There is another way of being rich, without laboring and without possessing lands, of which I have not yet spoken. It is necessary to explain its origin and its connection with the rest of the system of the distribution of riches in the society, of which I have just drawn the outline. This way consists in living upon what is called the revenue of one s money, or the interest one drawn from money placed on loan. Reciprocal want has led to the exchange of what people have for what they have not. People exchange one kind of produce for another, or produce of labor. In these exchanges it is necessary that the two parties should agree both as the quality and the quantity of each of the things exchanged. In this agreement it is natural that each should wish to receive as much as give as little as he can; and both being equally masters of what they have to give in the exchange, each has to balance the attachment he has for the commodity he gives against the desire he has for the commodity he wishes to receive, and to fix in accordance therewith the quantity of each of the thing exchange. Then how does the current value establish itself in the exchange of commodities? The price mid-way between the different offers and the different demands will become the current price, where to all the buyers and sellers will conform in their exchanges, until a diminution of the offer on the one side or of the demand on the other causes this valuation to change. Commerce gives to each article of commerce a current value, with respect to every other article; whence it follows that every article of commerce is the equivalent of a certain quantity of every other article, and can be regarded as a pledge which represents it. For example, if one bushel of corn is the equivalent of six pints of wine, and one sheep is the equivalent of three bushels of corn, this same sheep will be the equivalent of eighteen pints of wine. Hence each article of commerce can serve as the scale or common measure wherewith to compare the value of all others. Every commodity has the two essential properties of money, those of measuring and representing all value; and in this sense, every commodity is money. Reciprocally, all money is essentially merchandise. The metals, and especially gold and silver, are more fit for this purpose than any other substance. 37 Book IV. The French Revolution and the Industrial Revolution,

20 Gold and silver are constituted, by the nature of things, money, and universal money; independently of all convention and of all law. The employment of the other metals for these purposes is only subsidiary. The use of gold and silver as money has augmented their value of materials. The value of gold and silver, compared with the other articles of commerce and with one another, varies. It is well known that we now give in European from fourteen to fifteen ounces of silver for one ounce of gold; while at present in China, they give only about twelve ounces of silver to get one ounce of gold. The reserve of annual products is moveable riches. It is evident that men worked hard to obtain as much as possible of this kind of wealth before they became acquainted with money. All the various kinds of labors, whether in the cultivation of the land, in industry, or in commerce, require advances for (i) purchase of an estate of land, (ii) manufacturing and industrial enterprises, which would be paid by their profit they ought to yield. (iii) In advances for the enterprises of agriculture, the competition of capitalist undertakers in it establishes the current price of leases, and farming on a large scale; while the lack of capitalist undertakers restricts agriculture to the small-farming method. The class of cultivators is divided into farmers and mere wage-earners. (iv) In commerce, the undertakers, either in the cultivation of the land or in manufactures, get back their advances and their profits only from the sale of the fruits of the earth or of the manufactured commodities. However, without the assurance of his return and of indispensable profits, no merchant would undertake commerce, and no one could possibly go on with it, for which the merchant directs his speculation. It is this advance and this continual return of capitals which constitute what one must call the circulation of money. (v) The possessors of money balance the risk their capital may run if the enterprise does not succeed, with the advantage of enjoying a definite profit without labor; and they are influenced thereby to demand more or less profit or interest for their money, or to consent to lend it in return for the offered interest. 38 Chapter LXXII CI. A loan is a reciprocal contract, free between the two parties, which they make only because it is advantageous to them. The price of money ought be higher if the lender runs a risk of losing his capital by the insolvency of the borrower. The bargain is perfectly equal on both sides, and consequently fair. The price of borrowed money is regulated, like that of all other merchandise, by the balance of supply and demand: thus, when there are many borrowers who need money, the interest of money becomes higher; when there are many holders of money who offer to lend it, interest falls. Therefore, it is a mistake to suppose that the interest of money in commerce ought to be fixed by the laws of Princes. Money has two different valuations in commerce: the one expresses the quantity of money we give to procure the different sorts of commodities; the other expresses the relation of a sum of money to the interest it procures in accordance with the course of commerce. These tow valuation are independent of each other, and are governed by quite different principles. In the valuation of money with regard to commodities, it is the money considered as metal that is the subject of the estimate. In the valuation of the penny of money, it is the use of the money during the definite time that is the subject of the estimate. The price of interest depends immediately upon the relation between the demand of the borrowers and the offer of the lenders; and this relation depends chiefly on the quantity of moveable riches accumulated, by the saving of revenues and of annual products, to form capitals withal, whether these capitals exist in money or in any other kind of effects having a value in commerce. Money invested in land brings the least of return; money placed on loan brings rather more than the revenue of landed estates acquired with an equal capital; money invested in agricultural, manufacturing, and commercial undertakings is bound to bring more than the interest of money on loan. But the products of these different employments are limited by one another. The total wealth of a nation is composed: 1 st, of the net revenue of all the estates in land, multiplied by the rate at which land is sold; 2 nd, of the sum of all the moveable riches existing in the nation Book IV. The French Revolution and the Industrial Revolution,

21 Pre-Classical Economics in Britain: As described earlier, in Britain in the seventeenth century, a new scientific methodology was introduced by empiricists like Francis Bacon, and the Royal Society was founded in 1660 for the promotion of science; the theory of natural law was established by Thomas Hobbes and John Locke; and with the rise of individualism, the concept of the market economy was creating an economic division by placing the individual in a position of greater dependence upon objective market forces. William Petty was influenced by Hobbes and Bacon; and his Political Arithmetic attempted to measure the relative wealth and income of England, France, and Holland (see pages in my Book III). Locke stated the basic idea of the quantity theory of money very clearly, but it was not until Hume, half a century on, that the links between the quantity of money, the price level, and the balance of payments were clarified. Many elements of later theories of capital accumulation surfaced in the debates over interest rates without being brought together. It was just at this point, when the makings of a real advance seem, in retrospect, so obvious, that the advance of the 1690s fizzled out. Policy debates continued, of course, but nothing really new or substantial emerged from them for many years. Several key figures died before discussions on major issues: Petty died in 1687, North in 1691, Child in 1699, and Locke in In this period, the major debates were driven by immediate policy problem. Once the main issues of the 1690s were settled the legal interest rate was not lowered after all, take the argument further. Other, noneconomic, issue took center state. There were advances in the following period, but in France (Cantillon and others) or Scotland (Hume and others). 40 The case of Joh Law of France was already described in Book III (pages 327-8). Now let s investigate about David Hume and James Steuart as Pre-Classical economists in Britain. David Hume ( ): Hume s philosophy was also described in Chapter III (pages ). His economic thoughts appear in his Political Discourses (1752) and partially in A Treatise of Human Nature ( ). (a) His Treatise in Part II deals with Justice and Injustice. (i) Justice, whether a natural or artificial virtue? No action can be virtuous or morally good, unless there be in human nature some motive to produce it, distinct from the sense of its morality. (ii) The origin of justice and property: In the state of nature, there be neither justice nor injustice; and there was no such thing as property. (iii) The rules which determine property: The general rule, that possession must be stable, is not applied by particular judgments, but by other general rules, which must extend to the whole society, and be inflexible either by spite of favor. The possession of all external goods is changeable and uncertain; which is one of the most considerable impediments to the establishment of society, and is the reason why, by universal agreement, express or tacit, men restrain themselves by what we now call the rules of justice and equity. The right of succession is a very natural one, from the presumed consent of the parent or near relation, and from the general interest of mankind, which requires, that men's possessions should pass to those, who are dearest to them, in order to render them more industrious and frugal. (iv) The possession and property should always be stable, for a plain utility and interest, except when proprietor consents to bestow them on some other person. But sensible transference of property is commonly required by civil laws, and also by the laws of nature. (v) The obligation of promises: The rule of morality, which enjoins the performance of promises, is not natural. All morality depends upon our sentiments; so a promise is naturally something altogether unintelligible, nor is there any act of the mind belonging to it. (vi) Some farther reflections concerning justice and injustice: there are two different foundations: that of interest, it is impossible to live in society without restraining themselves by certain rules; and that of morality, when this interest is once observed and men receive a pleasure from the view of such actions as tend to the peace of society, and an uneasiness from such as are contrary to it. Interest is once established and acknowledge, the sense of morality in the observance of these rules follows naturally, and of itself, it is also augmented. 41 Book IV. The French Revolution and the Industrial Revolution,

22 (b) Eugene Rotwein s view on David Hume: 42 (i) In economic psychology, Hume s economic thought takes the form of a natural history of the rise and progress of commerce in which he seeks to explain the development of economic activity through the impact of changing environmental forces on certain human passions. Hume views that the motives of labor are action, pleasure, liveliness, and avarice. Man desires action because of curiosity or the love of truth, requiring challenge to his capacity and possessing some measures of utility, like hunting and gaming; man works for avarice or the desire for gain since money gives the buying pleasure with lucrative employment ; man desires liveliness in which quick march of spirits is essential for one s daily life contrasted to idleness without passion just like sleeping; man works for pleasure derived from the consumption of wealth; nevertheless, man works for multi-dimensional motives. 43 (ii) In political economy, Hume deals with money, interest, markets, taxes, and fiscal policies. In his monetary theory, money is not the wheel of trade but its oil making the motion of the wheels more smooth and easy. The supply of money raises the prices of commodities, which depend on the proportion between commodities and money, and any considerable alteration on either makes prices higher or lower. More commodities make prices lower, and more money makes prices higher, ceteris paribus. He introduces the concept of time lag occurring between money supply and price change: monetary expansion stimulates consumption without fear of inflation during the lagging period, which generates income and employment. In his interest theory, the supply of money does not affect interest rates, and the rising or fall of interest rates depends on demand for borrowing, the great or little riches to supply that demand, and rising or falling of profits from commerce. The rising of profits produces more lenders which lower interest rates, while the falling of profits makes the opposite. The relationship between interest rate and profit rates is mutually inter-dependent and functional rather than causal one. In the trade theory, emphasizing the role of foreign trade as a promoter of economic development, he believes that foreign trade is mutually beneficial since it brings the pleasure of luxury, the profits of commerce, the generation of employment, and the transfer of technology with diffusion of foreign products. In taxation and public finance, Hume views both suppressive and stimulating effects of the taxburden or public debt. The advantages of public debt is to provide investment outlet for idle funds of merchants and other investors giving expansionary effects, while the disadvantages of that is the growth of the rental class of idleness and foreign control of domestic assets. Continuous expansion of public debt is not sustainable, since it will ultimately result in total bankruptcy, and heavy tax burden will ruin the landowners and destroy the basis of political power. 44 (iii) In moral economics, Hume views that luxury must be judged since it is the source of many ills; that the growth of economic activity introduces that of industry, knowledge, and humanity; and that commerce is beneficial since it promotes a nation s spirit, defense capacity, and political harmony. Believing that wealth is the friend of virtue, Hume understands that economic growth and prosperity provides the national security, a civilized social life, political liberty, and a fulfillment of individual talents and of human satisfaction; and that economic change is fundamental to social and political changes. He views that property is nothing but those goods, whose constant possession is established by the laws of society; that is, by the laws of justice along with their scarcity; and property is useful and absolutely necessary to human society. The rule of property assignment to the present possessor is natural, but its possession is changeable and uncertain, so that the question is how to separate their possessions through occupation, prescription, accession, and succession. Hume endorsed the unequal distribution of property: perfect equality seems to be highly useful and ideal, but its economic cost is prohibitive with impoverishment and its political consequence is disastrous with tyranny or anarchy. As a fellow Scotsman, Hume was a close friend of Adam Smith though 12 years younger than him Book IV. The French Revolution and the Industrial Revolution,

23 (c) Political Discourses (1752): 46 (i) On Commerce: The greatness of the sovereign and the happiness of the state are united with regard to trade and manufacture. Trade and industry are really nothing but a stock of labor, which, in time of peace and tranquility, is employed for the ease and satisfaction of individuals; but in the exigencies of state, may, in part, be turned to public advantage. Foreign commerce increases the stock of labor in the nation; and the sovereign may convert what share of it he finds necessary to the service of the public. Foreign trade, by its imports, furnishes materials for new manufactures; and by its exports, it produces labor in particular commodities, which could not be consumed at home. In short, a kingdom, that has a large import and export, must abound more with industry, and that employed upon delicacies and luxuries, than a kingdom which rests contended with its native commodities. It is, therefore, more powerful, as well as richer and happier. The individuals leap the benefit of these commodities, so far as they gratify the senses and appetites. And the public is also a gainer, while a greater stock of labor is, by this means, stored up against any public exigency; that is, a greater number of laborious men are maintained, who may be diverted to the public service, without robbing any one of eh necessaries, or even the chief conveniences of life. Men become acquainted with the pleasures of luxury and the profits of commerce. Where riches are in few hands, these must enjoy all the power, and will readily conspire to lay the whole burden on the poor, and oppress them still farther, to the discouragement of all industry. In this circumstance consists the great advantage of England above any nation at present in the world, or that appears in the records of any story. It is true, the English feel some disadvantages in foreign trade by the high price of labor, which is in part the effect of the riches of their artisans, as well as of the plenty of money. The poverty of the common people in France, Italy, and Spain, is, in some measure, owing to the superior riches of the soil and happiness of the climate; yet there want not reasons to justify this paradox. 47 (ii) Of Money: It seems a maxim almost self-evident, that the prices of everything depend on the proportion between commodities and money, and that any considerable alteration on either has the same effect, either of heightening or lowering the price. Increase the commodities, they become cheaper; increase the money, they rise in their value. The opposite of the former may cause contrary tendencies. It is also evident that the prices do not so much depend on the absolute quantity of commodities and that of money, which are in a nation, as on that of the commodities, which come or may come to market, and of the money which circulates. It is the proportion between the circulating money, and the commodities in the market, which determines the prices. Goods, that are consumed at home, or exchanged with other goods in the neighborhood, never come to market; they affect not in the least the current specie; with regard to it they are as if totally annihilated; and consequently this method of using them sinks the proportion on the side of the commodities, and increases the prices. But after money enters into all contracts and sales, and is everywhere the measure of exchange, the same national cash has a much greater task to perform; all commodities are then in the market; the sphere of circulation is enlarged; it is the same case as if that individual sum were to serve a larger kingdom; and therefore, the proportion being here lessened on the side of the money, everything must become cheaper, and the prices gradually fall. The want of money can never injure any state within itself, since men and commodities are the real strength of any community. It is the simple manner of living which here hurts the public, by confining the gold and silver to few hands, and preventing its universal diffusion and circulation. On the contrary, industry and refinements of all kinds incorporate it with the whole state, however small its quantity may be: they digest it into every vein, so to speak; and make it enter into every transaction and contract. As prices of everything fall by that means, the sovereign has a double advantage: he may draw money by his taxes from every part of the state. 48 Book IV. The French Revolution and the Industrial Revolution,

24 (iii) Of Interest: Prices have risen near four times since the discovery of the Indies; and it is probable gold and silver have multiplied much more. But interest has not fallen much above half. The rate of interest, therefore, is not derived from the quantity of the precious metals. High interest arises from three circumstances: a great demand for borrowing; little riches to supply that demand; and great profits arising from commerce; and these circumstances are a clear proof of the small advance of commerce and industry, not of the scarcity of gold and silver. Low interest, on the other hand, proceeds from the three opposite circumstance: a small demand for borrowing; great riches to supply that demand; and small profits arising from commerce; and these circumstances are all connected together, and proceed from the increase of industry and commerce, not of gold and silver. An increase of commerce, by a necessary consequence, raises a great number of lenders, and by that means produces lowness of interest. First, in the landed interest, when a people have emerged ever so little from a savage state; those who possess more land than they can labor, employ those who possess none, and agree to receive a determinate part of the product. Hence, the landed interest is immediately established without any settled government. Secondly, in the great or little riches to supply the demand, the effect depends on the habits and way of living of the people, not on the quantity of gold and silver. In order to have, in any state, a great number of lenders, it is not sufficient nor requisite, that there be great abundance of the precious metals. It is only requisite, that the property or command of that quantity, which is in the state, whether great or small, should be collected in particular hands, so as to form considerable sums, or compose a great monied interest. Thirdly, an increase of commerce raises a great number of lenders, which may cause lowness of the interest. All these circumstances determine the profits of commerce, and the proportion between the borrowers and lenders in any state; while interest is the barometer of the state the lowness of interest is a sign of infallible economic conditions. 49 (iv) Of Balance of Trade: Can one imagine, that it had ever been possible, by any laws, or even by any art or industry, t have kept all the money in Spain, which the galleons have brought from the Indies? Or that all commodities could be sold in France for a tenth of the price which they would yield on the other side of the Pyrenees, without finding their way thither, and draining from that immense treasure? What other reason, indeed, is there, why all nations, at present, gain in their trade with Spain and Portugal; but because it is impossible to heap up money, more than any fluid, beyond its proper level? The sovereign of these countries have shown, that they wanted not inclination to keep their gold and silver to themselves, had it been in any degree practicable. But as anybody of water may be raised above the level of the surrounding element, if the former has no communication with the latter; so in money, if the communication be cut off, there may, in such a case, be a very great inequality of money. Thus the immense distance of China, together with the monopolies of our India companies, obstructing the communication, preserve in Europe the gold and silver, especially the latter, in much greater plenty than they are found in that kingdom. But notwithstanding this great obstruction, the force of the causes above-mentioned is still evident. The skill and ingenuity of Europe in general surpasses perhaps that of China, with regard to manual arts and manufactures; yet are we never able to trade thither without great disadvantage. And were it not for the continual recruits, which we received from America, money would soon sink in Europe, and rise in China, till it came nearly to a level in both places. Nor can any reasonable man doubt, but that industrious nations, were they as near us as Poland or Barrary, would drain us of the over-plus of our specie, and draw to themselves a larger share of the West Indian treasures. We need not have recourse to a physical attraction, in order to explain the necessity of this operation. There is a moral attraction, arising from the interests and passions of men, which is full as potent and infallible. I scarcely know any method of sinking money below its level, but those institutions of banks, funds, and paper-credits, which are so much practiced in this kingdom Book IV. The French Revolution and the Industrial Revolution,

25 These render paper equivalent to money, circulate it throughout the whole state, make it supply the place of gold and silver, raise proportion-ably the price of labor and commodities, and by that means either banish a great part of those precious metals, or prevent their farther increase. Before the introduction of paper-money into our colonies, they had gold and silver sufficient for their circulation. Since the introduction that commodity, the lease inconveniency that has followed is the total banishment of the precious metals. And after the abolition of paper, can it be doubted but money will return, while these colonies possess manufactures and commodities, the only thing valuable in commerce, and for whose sake alone all men desire money. Our modern politics embrace the only method of banishing money, the using of paper-credit; they reject the only method of amassing it, the practice of hoarding; and they adopt a hundred contrivances, which serve to no purpose but to check industry, and rob ourselves and our neighbors of the common benefits of art and nature. All taxes, however, upon foreign commodities, are not to be regarded as prejudicial or useless, but those only which are founded on the jealousy above-mentioned. A tax on German linen encourages home manufactures, and thereby multiplies our people and industry. A tax on brandy increases the sale of rum, and supports our southern colonies. And as it is necessary, that imposts should be levied, for the support of government, it may be thought more convenient to lay them on foreign commodities, which can easily be intercepted at the port, and subjected to the impost. A thousand years, the money of Europe has been flowing to Rome, by an open and sensible current; but it has been emptied by many secret and insensible canals; and the want of industry and commerce renders at present the papal dominions the poorest territory in all Italy. Thus a government has great reason to preserve with care its people and its manufactures. Its money, it may safely trust to the course of human affairs, without fear or jealousy. Or if it ever give attention to this latter circumstance, it ought only to be so far as it affects the former. 51 (v) Of Taxes: The best taxes are such as are levied upon consumptions, especially those of luxury; because such taxes are least felt by the people. They seem, in some measure, voluntary; since a man may choose how far he will use the commodity which is taxed; they are paid gradually and insensibly; they naturally produce sobriety and frugality, if judiciously imposed; and being confounded with the natural price of the commodity, they are scarcely perceived by the consumers. Their only disadvantage is, that they are expensive in the levying. Taxes upon possessions are levied without expense; but have every other disadvantage. Most states, however, are obliged to have recourse to them, in order to supply the deficiencies of the other. But the most pernicious of all taxes are the arbitrary. They are commonly converted, by their management, into punishments on industry; and also, by their unavoidable inequality, are more grievous, than by the real burden which they impose. It is surprising, therefore, to see them have place among any civilized people. In general, all poll-taxes, even when not arbitrary, which they commonly are, may be esteemed dangerous; because it is so easy for the sovereign to add a little more, and a little more, to the sum demanded, that these taxes are apt to become altogether oppressive and intolerable. On the other hand, a duty upon commodities checks itself; and a prince will soon fine, that an increase of the impost is no increase of his revenue. It is not easy, therefore, for a people to be altogether ruined by such taxes. Historians inform us, that one of the chief causes of the destruction of the Roman state, was the alteration, which Constantine introduced into the finances, by substituting a universal poll-tax, in lieu of almost all the tithes, customs, and excises, which formerly composed the revenue of the empire. The people, in all the provinces, were so grinded and oppressed by the publicans, that they were glad to take refuge under the conquering arms of the barbarians; whose dominion, as they had fewer necessities and less art, was found preferable to the refined tyranny of the Romans. In years of scarcity, the weaver either consumes less or labor more, or employs both these expedients of frugality and industry, by which he is able to survive. 52 Book IV. The French Revolution and the Industrial Revolution,

26 (vi) Of Public Credit: War is attended with every destructive circumstance; loss of men, increase of taxes, decay of commerce, dissipation of money, devastation by sea and land. The consequences of public debts can be examined: in our domestic management, by their influence on commerce and industry; and in our foreign transactions, by their effect on wars and negotiations. Public securities are with us become a kind of money and pass as readily at the current price as gold or silver. Our national debts furnish merchants with a species of money that is continually multiplying in their hands, and produces sure gain, besides the profits of their commerce. This must enable them to trade upon less profit. The small profit of the merchant renders the commodity cheaper, causes a greater consumption, quickens the labor of the common people, and helps to spread arts and industry throughout the whole society. Frist, national debts cause a confluence of people and riches to the capital, by the great sums, levied in the provinces to pay the interest. Secondly, public stocks, being a kind of paper-credit, have all the disadvantages attending that species of money. They banish gold and silver from the most considerable commerce of the state, reduce them to common circulation, and by that means render all provisions and labor dearer than otherwise they would be. Thirdly, the taxes, which are levied to pay the interests of these debts, are apt either to heighten the price of labor, or be an oppression on the poorer sort. Fourthly, as foreigners possess a great share of our national funds, they render the public, in a manner tributary to them, and may in time occasion the transport of our people and our industry. Fifthly, the greater part of the public stock being always in the hands of idle people, who live on their revenue, our funds, in that view, give great encouragement to an useless an un-active life. (vii) Of the Populousness of Ancient Nations: The chief difference between the domestic economy of the ancient and that of the moderns consists in the practice of slavery, which prevailed among the former, and which has been abolished for some centuries throughout the greater part of Europe. Our present business is only to consider the influence of slavery on the populous-ness of a state. At present, all masters discourage the marrying of their male servants, and admit not by any means the marriage of the female, who are then supposed altogether incapacitated for their service. But where the property of the servants is lodged in the master, their marriage forms his riches, and brings him a succession of slaves that supply the place of those whose age and infirmity have disabled. He encourages, therefore, their propagation as much as that of his cattle; rears the young with the same care; and educates them to some art or calling, which may render them more useful or valuable to him. In disadvantages of populous-ness, (i) we may observe that the ancient republics were almost in perpetual war, a natural effect of their martial spirit, their love of liberty, their mutual emulation, and that hatred which generally prevails among nations that live in close neighborhood. The maxims of ancient war were much more destructive than those of modern, and ancient battles were much more bloody, by the very nature of the weapons employed in them. (ii) It appears that ancient manners were more unfavorable than the modern, not only in times of war, but also in those of peace; and that too in every respect, except the love of civil liberty and of equality, which is, I own, of considerable importance. In ancient history, we may always observe, where one party prevailed, whether the nobles or people that they immediately butchered all of the opposite party who fell into their hands, and banished such as had been so fortunate as to escape their fury. No form of process, no law, no trial, no pardon. The maxims of ancient politics contain, in general, so little humanity and moderation, that it seems superfluous to give any particular reason for the acts of violence committed at any particular period. (iii) There are many other circumstances, in which ancient nations seem inferior to the modern, both for the happiness and increase of mankind. Trade, manufactures, industry, were nowhere, in former ages, so flourishing as they are at present in Europe. The only garb of the ancients, both for males and females, seems to have been a kind of flannel, which they wore commonly white or grey Book IV. The French Revolution and the Industrial Revolution,

27 James Steuart ( ) was born in Edinburgh and studied law at the Edinburgh University. Passing a bar examination in 1735, he spent the years traveling Europe during , studying at the Universities of Leyden and Utrecht in Holland for two years, and visiting various cities of Spain, Italy, and France. Returning to Edinburgh, as a Jacobite, he was involved in an ill-fated attempt for Prince Charles to restore Scotland to the Stuarts with the support of France during He exiled to Paris and Angouleme where he remained until He went to Brussels and Spa, and traveled German cities; and settled at Tubingen for four years, while his studies had made much progress through exchanging of ideas with professors and visiting and observing of economic conditions at various places. Moving to Rotterdam and Antwerp in 1761, his family returned to Spa, where he became a prisoner by the French troops. Being released by the peace of 1763, he gained liberty and his family returned to Scotland. He published An Inquiry into the Principles of Political Economy in London in 1767, which was the final output of eighteen years of thought and travel. Since Steuart was trained in law and had been away from the British Isle during major part of his adult life, and wrote a bulk of his Principles in exile in Germany; his economic thought was influenced by German Cameralism, 54 the German counterpart of the French mercantilism, advocating government intervention in the economy, rather than British liberalism. He paid attention to matters of state action and to approximate a system of economic policy rather than economic theories. He was appreciated in Germany, while Malthus and Ricardo in Britain recognized his name as a forerunner of political economy, but Smith kept silence. Being fully pardoned by 1771, he was invited by the East India Company to examine the currency problem of Bengal, which study was published in He wrote essays on various subjects with practical commitments until he died. He was political economist, precursor of Keynes, advocate of the planned economy, and the last of the great mercantilist. His Principles consists of five books. BOOK I. Population and Agriculture: James Steaurt describes as below. The rapid progress that has been made in our own country during the last fifty years, in tracing the origins and progress of the present establishment in Europe. I consider mankind as savages, living on spontaneous fruits of the earth and confined as to numbers to the actual extent of these productions. (i) In exchange economy or money economy, men were then forced to labor because they were slaves to others; men are now forced to labor because they are slaves to their own wants. I deduce modern liberty from the independence of the same classes, by the introduction of industry and circulation of an adequate equivalent for every service. (ii) A general tacit contract from which reciprocal and proportional services result universally between all who compose it. Framers produce the subsistence; and free hands procure subsistence out of the superfluity of the farmers. Many will run to the plow; the superfluity of the farmers will augment; the rich will call for superfluities; the free hands will supply them and demand food in their turn. These will not be found a burden on the husbandman as formerly; the rich who hired of them their labor or service, must pay them money and this money in their hands will serve as equivalent for the superfluity of nourishment produced by additional agriculture. (iii) Growth in one sector of the economy must bear a definite relationship to growth in the other: agriculture among a free people will augment population, in proportion only as the necessitous are put in a situation to purchase subsistence with their labor; the other is that the augmentation must be made to bear a due proportion to the progress of industry and wants of the people or else an outlet must be found for disposing of the superfluity. 55 Population growth proceeds on the basis of an agricultural output which exceeds the requirements of the farm population. It will be produced in response to a reciprocal demand, that of the nonagricultural population for foodstuffs and that of the farmers for manufactures. Industrial development thus becomes a prerequisite both of the expansion of production in the agricultural sector and of the growth of the population facilitated by such an expansion. 56 Book IV. The French Revolution and the Industrial Revolution,

28 BOOK II. Trade and Industry: (i) Trade is a form of activity which follow on the introduction of industry. Trade within and between states, would immeasurably increase the possibilities of economic growth through the provision of wider markets and the stimulation given to relatively backward nations. Hence, trade has an evident tendency towards the improvement of the world in general. Intercourse tends to unite the most distant nations as well as to improve them; and their mutual interest leads them to endeavor to become serviceable to one another. If one considers the variety which is found in different countries, in the distribution of property, subordination of classes, genius of people, proceeding from the variety of forms of government, laws, climates and manners, one may conclude that the political economy in each must necessarily be different. (ii) We have suppose a country capable of improvement, a laborious people, a taste for refinement and luxury in the rich, an ambition to become so, and an application to labor and ingenuity in the lower classes of men. According to greater or lesser degree of force, or concurrence of these and like circumstances, will the country in question become more or less cultivated, and consequently peopled. We are now engaged in a more complex operation; we represent different societies, animated by a different spirit; some given to industry and frugality, others to dissipation and luxury. While there are different states, there must be separate interests, and when no one statesman is found at the head of these interests, there can be no such thing as a common good, and when there is no common good, every interest must be considered separately. (iii) In the rates of growth and the corresponding emphasis on policy, Steuart considers the three stages of trade. First, in infant trade, the object of policy is to encourage industry and to introduce manufactures and machines: I apprehend to be the reason why we see certain manufactures after remaining long in a state of infancy, making in a few years a most astonishing progress. Secondly, in foreign trade, the potential of growth is at a maximum. At this point the restrictive policies used in the first period are no longer relevant and the object of policy must be to watch over internal price levels rather than protection or import control. The ruling principles are to banish luxury to encourage frugality, to fix the lowest standard of prices possible. Thirdly, in inland trade, internal price levels were almost bound to get out of line with average (world) prices; a situation which could be offset by the use of subsidies and premiums in the short run, but which must inevitably lead to a loss of markets. The growth of all bodies, natural as well as artificial, is stopped by internal causes derived from their enormous size and greatness. (iv) Price Theory: In the price of goods, I consider the real value of the commodity, and the profit upon alienation. The real value of a good is determined the value of the workman s subsistence and necessary expense, both for supplying his personal wants, and providing the instruments belong to the profession, which must be taken upon an average, reflecting working time and substance. The price of manufacture cannot be lower than the real value, whereas profit will fluctuate in response to the changing circumstances of demand. By the extensive dealings of merchants, and their constant application to the study of the balance of work and demand, all the above circumstances are known to them, and are made known to the industrious, who regulate their living and expense according to their certain profit. Steuart s theory of demand opens a window to what later was to become the theory of markets. If competition is great among buyers, price will be high; if it is great among sellers, price will be low. Competition is simple when it is stronger on one side of the market than on the other, double when there is competition on both sides. Demand is interpreted in the schedule sense rising prices stop it, falling ones increase it. Under the influence of double competition the balance of supply and demand, called by Steuart work and demand, is sustained in equilibrio, that is, the quantity supplied is in proportion to the quantity demanded. The word equilibrium, was already employed by the Physiocrats and others. Changes in demand call for the intervention of the statesman Book IV. The French Revolution and the Industrial Revolution,

29 BOOK III. Money and Coin: (i) The proportion between gold and silver in the coin can be established by the market price of the metals only; because an augmentation and rise in the demand for gold or silver has the effect of augmenting the value of the metal demanded. The active demand for either gold or silver, which makes the price of the metals to vary, I think language would be more correct never to mention the sinking of the price of either gold or silver. As to every other merchandize, the expression is very proper; because the diminishing of the price of one commodity, does not so essentially imply the rise of any other, as the sinking of one of the metals must imply the rising of the other, since they are the only measures of one another s worth. Consequently, merchandize which has not varied in its relative value to any other thing but to gold and silver, must be measured by the mean proportion of the metals, and the application of any other measure to it is altering the standard. If it is measured by the gold, the standard is debased; if by silver, it is raised, as shall presently be proved. (ii) Concerning the deviations in the coin from the proportion in the market price of the metals, and from the legal weight, we lay down this principle that the value of the money-unit of account is not to be sought for in the statues and regulations of the mint, but in the actual intrinsic value of that currency in which all obligations are acquitted, and all accounts are kept. The operation of raising and debasing the coins is performed in three ways: by augmenting or diminishing the weight of the coin; by augmenting or diminishing the proportion of alloy in the coin; and by augmenting to diminishing the proportion between the money (coin) and the money of account, as if every sixpence were a shilling. 58 BOOK IV. Credit and Debts: (i) There is in every state a certain number of persons who have occasion to borrow money, and a certain number of persons who desire to lend: there is also a certain sum of money demanded by the borrowers, and a certain sum offered to be lent. The borrowers desire to fix the interest as low as they can; the lenders seek, from a like principle of self-interest, to carry the rate of it as high as they can. From this combination of interests arises a double competition, which fluctuates between the two parties. The price of commodities is extremely fluctuating: they are everyone calculated for particular uses; money serves every purpose. Commodities, though of the same kind, differ in goodness; money is all, or ought to be all of the same value, relatively to its denominations. Hence the price of money is susceptible of a far greater stability and uniformity, than the price of any other thing. (ii) When public credit is employed for raising money upon payment of a perpetual interest; or if, whatever be the plan laid down, capitals should not happen to be discharged, but the debts should swell continually; in this case the contingent consequences are many and various, far exceeding any man s sagacity to investigate. All debts will in time disappear, either by being paid, or by being abolished, because it is not to be expected that posterity will groan under such a load any longer than it is convenient; and because in fact we see no very old public debts as yet outstanding, where interest has been regularly paid out of a fund which has remained in the possession of the state. 59 BOOK V. Taxes and their proper Application: When in any country the work of manufactures, who live luxuriously, and who can afford to be idle some days of the week, finds a ready market; this circumstance alone proves beyond all dispute, that subsistence in that country is not too dear, at least in proportion to the market prices of goods at home; and if taxes on consumption have, in fact raised the price of necessaries, beyond the former standard, this rise, cannot, in fact, discourage industry: it may discourage idleness; and idleness will not be totally rooted out, until people be forced, in one way or other, to give up both superfluity and days of recreation. For this reason it is generally thought, because taxes are higher in England than in some other countries, that foreign trade should therefore be hurt by them. But the sloth and idleness of man, and the want of ambition in the lower classes to improve their circumstances, tends more, I suspect, to lessen the production of industry, and thus to raise their price, than any tax upon subsistence. 60 Book IV. The French Revolution and the Industrial Revolution,

30 Photo IV-2-1. Jean-Baptiste Say Source: Photo IV-2-2. Adam Smith Book IV. The French Revolution and the Industrial Revolution,

31 2. Classical Capitalism: Adam Smith and Jean-Baptiste Say Capitalism is an economic system based on private ownership of the means of production and their operation for profit. Characteristics central to capitalism include private property, capital accumulation, wage labor, voluntary exchange, a price system, and competitive markets. In a capitalist market economy, decision-making and investment is determined by the owners of the factors of production in financial and capital markets, and prices and the distribution of goods are mainly determined by competition in the market. Economists, political economists, and historians have adopted different perspectives in their analyses of capitalism and have recognized various forms of it in practice. These include laissez-faire or free market capitalism, welfare capitalism, and state capitalism. Different forms of capitalism feature varying degrees of free markets, public ownership, obstacles to free competition, and state-sanctioned social policies. The degree of competition in markets, the role of intervention and regulation, and the scope of state ownership vary across different models of capitalism; the extent to which different markets are free, as well as the rules defining private property, are matters of politics and of policy. Most existing capitalist economies are mixed economies, which combine elements of free markets with state intervention, and in some cases, with economic planning. Capitalism has existed under many forms of government, in many different times, places, and cultures. Following the decline of mercantilism, mixed capitalist systems became dominant in the Western world and continue to spread. According to economist Joseph Schumpeter, capitalism is the most successful economic system that has existed thus far. Capitalism, he observed, creates wealth through advancing continuously to ever higher levels of productivity and technological sophistication; this process, known as creative destruction, requires that the old be destroyed before the new can take over. 61 Capital has existed incipiently on a small scale for centuries, in the form of merchant, renting and lending activities, and occasionally also as small-scale industry with some wage labor. Simple commodity exchange, and consequently simple commodity production, which form the initial basis for the growth of capital from trade, have a very long history. The capitalistic era according to Marx dates from the 16th century, i.e. it began with merchant capitalism and relatively small urban workshops. Early Islam promulgated capitalist economic policies, which migrated to Europe through trade partners from cities such as Venice. During the age of discovery, merchant traders engaged in the geographic exploration of foreign lands, especially from England and the Low Countries. Mercantilism was a system of trade for profit. European merchants, backed by state controls, subsidies, and monopolies, made most of their profits from the buying and selling of goods. In the words of Francis Bacon, the purpose of mercantilism was the opening and wellbalancing of trade; the cherishing of manufacturers; the banishing of idleness; the repressing of waste and excess by sumptuary laws; the improvement and husbanding of the soil; the regulation of prices...the British East India Company and the Dutch East India Company inaugurated an expansive era of commerce and trade. These companies were characterized by their colonial and expansionary powers given to them by nation-states. During this era, merchants, who had traded under the previous stage of mercantilism, invested capital in the East India Companies and other colonies, seeking a return on investment. 62 In the eighteenth century, a new group of economists, such as David Hume and Adam Smith, challenged mercantilist doctrines. During the Industrial Revolution, the capitalist system was established: the surplus generated by the rise of commercial agriculture encouraged increased mechanization of agriculture. Industrial capitalism marked the development of the factory system of manufacturing, characterized by a complex division of labor between and within work process and the routine of work tasks; and finally established the global domination of the capitalist mode of production by abandoning its protectionist policy. Book IV. The French Revolution and the Industrial Revolution,

32 Adam Smith ( ): Smith was born in Kirkcaldy in the County of Fife in Scotland to Adam Smith who was a Scottish writer, advocate, and prosecutor, also serving as comptroller of Customs in Kirkcaldy. His father died two month after he was born, leaving his mother widow; and he was close to his mother, who probably encouraged him to pursue his scholarly ambitions. He attended the secondary school at his home town during , where he learned Latin, mathematics, history and writing. Smith entered the University of Glasgow when he was fourteen and studied moral philosophy under Francis Hutcheson. Here, Smith developed his passion for liberty, reason, and free speech. In 1740 Smith was the graduate scholar presented to undertake postgraduate studies at Balliol College, Oxford, under the Snell Exhibition. Adam Smith considered the teaching at Glasgow to be far superior to that at Oxford, which he found intellectually stifling. In Book V, Chapter II of The Wealth of Nations, Smith wrote: In the University of Oxford, the greater part of the public professors have, for these many years, given up altogether even the pretense of teaching. Smith is also reported to have complained to friends that Oxford officials once discovered him reading a copy of David Hume's Treatise on Human Nature, and they subsequently confiscated his book and punished him severely for reading it.nevertheless, Smith took the opportunity while at Oxford to teach himself several subjects by reading many books from the shelves of the large Bodleian Library. When Smith was not studying on his own, his time at Oxford was not a happy one, according to his letters He left Oxford University in 1746, before his scholarship ended. In Book V of The Wealth of Nations, Smith comments on the low quality of instruction and the meager intellectual activity at English universities, when compared to their Scottish counterparts. He attributes this both to the rich endowments of the colleges at Oxford and Cambridge. 63 Smith began delivering public lectures in 1748 in Edinburgh on rhetoric and his lecture was successful. As economics grew out of philosophy, Smith was influenced by Bernard Mandeville ( ), and largely by Francis Hutcheson ( ) who chaired moral philosophy at Glasgow to lecture in English instead of Latin from Meeting David Hume in 1750, In their writings covering history, politics, philosophy, economics, and religion, Smith and Hume shared closer intellectual and personal bonds than with other important figures of the Scottish Enlightenment. Smith was also influenced by A. R. J. Turgot of France. In 1751, Smith earned a professorship at Glasgow University teaching logic courses, and in 1752 he was elected a member of the Philosophical Society of Edinburgh, having been introduced to the society by Lord Kames. When the head of Moral Philosophy in Glasgow died the next year, Smith took over the position. He worked as an academic for the next thirteen years, which he characterized as by far the most useful and therefore by far the happiest and most honorable period of his life. Smith published The Theory of Moral Sentiments in 1759, embodying some of his lectures at Glasgow, concerning how human morality depends on sympathy between agent and spectator, or the individual and other members of society. In 1762, the University of Glasgow conferred on Smith the title of Doctor of Laws. At the end of 1763, Smith took the tutoring position for Henry Scott, the young Duke of Buccleuch the stepson of Charles Townshend, by resigning from his professorship. As a tutor, Smith travelled to Toulouse, France where he stayed for one and a half years. His continuous travel made him to know several great intellectual leaders of the time. In 1766, when Henry Scott s younger brother died in Paris, Smith returned home to Kirkcaldy, and he devoted much of the next ten years to his book, An Inquiry to the Nature and Causes of the Wealth of Nation, published in 1776, which was an instance success, selling out its first edition in only six months. In 1778, Smith was appointed to the commissioner of customs in Scotland. He became a founding member of the Royal Society of Edinburg, and occupied the honorary position of Lord Rector of the University of Glasgow from 1787 to Book IV. The French Revolution and the Industrial Revolution,

33 In an introduction for an issue of the Wealth of Nations in 1991, Paul Samuelson of MIT wrote that Wealth of Nations is his masterpiece. It is a classic just as Isaac Newton s Principia is the classic that described how the heavens and earth are run by the universal law of gravitation. If you have never heard of Charles Darwin or Sigmund Freud, you are not an educated person. And to understand the spirit of our age, you certainly do need an acquaintance with Adam Smith s doctrine of the invisible hand As the general public reckons greatness, Adam Smith, Karl Marx, and John Maynard Keynes are the top economist trio one for the eighteenth, and one for the nineteenth, and one for the twentieth century. Although Smith goes back the farthest, I suspect a century from now his wisdom will stand out highest Like the Newtonian machine that runs the planets and stars, Smith conceives the economy to be a self-regulating market mechanism. Each good gets a natural price set to just cover its competitive costs of labor s wages, land s rent, and capital s profit. But what makes the wage be high or low? When population is scanty relative to acres of land and capital goods to work with, superabundant land will bid down rents and most of the natural product and income will get bid for high wage and profit rate. But fat wages, Smith thought, would cause the birth rate to soar and the death rate to fall. And lush profits would both motivate and supply new savings. Result: the vast supplies of labor and capital, with land supply un-expandable, must bring both wage rate and profit rate back down toward their subsistence levels. This long-run equilibrium will prevail and an endless circular flow of production and consumption will persist. Thus, Smith s classical capitalism is based on individualism, rested on the proposition that if individuals were free to follow their own self-interest and to engage in exchanges advantageous to themselves, not only the individuals but society as a whole would gain. If government impeded such exchanges, individual welfare would diminish Exchanges must take place in open markets exposed to competition from others. 66 Adam Smith became the prophet of the commercial society of modern capitalism due to recognition of profit motive in ethics, introduction of laissez faire in the market, and advocate of capital investment for productivity growth. First, in The Theory of Moral Sentiments of 1759, Smith expresses that the drive for economic self-interest does not, or at least not necessarily, undermine the important moral values of society. He recognizes that self-interest can be a danger to society s happiness under certain conditions, but it is not a great danger. To Smith, inequality is part of the natural order, and the protection of life and property is more important to the best interest of society for universal happiness. He accepts individual pursuance of self-interest through private enterprise with profit motives, which is a bold approach to capitalism when British moral philosophy is in conflict between the principle of self-interest and that of sympathy. 67 Secondly, in An Inquiry into the Nature and Causes of the Wealth of Nations of 1776, Smith explains natural liberty as the principle of laissez faire guided by invisible hand. Smith asserts that political freedom of Locke cannot flourish without economic freedom. He knows that either government intervention or monopoly in markets would diminish the welfare of individuals. Though government attempts to stimulate foreign trade in the mercantilist system, a system of control and subsidies distorts resource allocation and reduces economic efficiency. 68 Thirdly, Smith believes that individual savings allows new capital investment, which requires additional labor and raises productivity. As a result, the economy produces more output with less cost, which raises the level of social welfare as a whole. The productivity growth is a driving force for economic efficiency of the capitalism. When The Wealth of Nations caught the tide of the industrial revolution, Smith contributed to the theories initiating and operating the system of capitalistic economy. His doctrine of free trade and his critical attitude to the institutions and public policies were linked to the French Revolution, so that although Smith was no reactionary, the field of political economy came under suspicion as dangerous thoughts. 69 Book IV. The French Revolution and the Industrial Revolution,

34 The Theory of Moral Sentiments (1759): PART I. The Propriety of Action: Section I, Chapter I. Sympathy: (i) How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it. Of this kind is pity or compassion, the emotion which we feel for the misery of others, when we either see it, or are made to conceive it in a very lively manner. That we often derive sorrow from the sorrow of others, is a matter of fact too obvious to require any instance to prove it; for this sentiment, like all the other original passions of human nature, is by no means confined to the virtuous and humane, though they perhaps may feel it with the most exquisite sensibility. The greatest ruffian, the most hardened violator of the laws of society, is not altogether without it. (ii) Sympathy does not arise so much from the view of the passion, as from that of the situation which excites it. We sometimes feel for another, a passion, of which he himself seems to be altogether incapable; because when we put ourselves in his case, that passion arises in our breast from the imagination, though it does not in his from the reality. We blush for the impudence and rudeness of another, though he himself appears to have no sense of the impropriety of his own behavior; because we cannot help feeling with what confusion we ourselves should be covered, had we behaved in so absurd a manner. 70 Chapter II. The pleasure of mutual sympathy: But whatever may be the cause of sympathy, or however it may be excited, nothing pleases us more than to observe in other men a fellowfeeling with all the emotions of our own breast; nor are we ever so much shocked as by the appearance of the contrary. Those who are fond of deducing all our sentiments from certain refinements of self-love, think themselves at no loss to account, according to their own principles, both for this pleasure and this pain. Man, say they, conscious of his own weakness, and of the need which he has for the assistance of others, rejoices whenever he observes that they adopt his own passions, because he is then assured of that assistance; and grieves whenever he observes the contrary, because he is then assured of their opposition. But both the pleasure and the pain are always felt so instantaneously, and often upon such frivolous occasions, that it seems evident that neither of them can be derived from any such self-interested consideration. A man is mortified when he looks round and sees that nobody laughs at his jests but himself. 71 Chapter III. The corruption of our moral sentiments: (i) The disposition to admire, and almost to worship, the rich and the powerful, and to despise or at least to neglect, persons of poor and mean condition, though necessary both to establish and to maintain the distinction of ranks and the order of society, is, at the same time, the great and most universal cause of the corruption of our moral sentiments. That wealth and greatness are often regarded with the respect and admiration which are due only to wisdom and virtue; and that the contempt, of which vice and folly are the only proper objects, is often most unjustly bestowed upon poverty and weakness, has been the complaint of moralists in all ages. We desire both to be respectable, and to be respected. (ii) To attain to the envied situation, the candidates for fortune frequently abandon the paths of virtues; for unhappily, the road which leads to the one, and that which leads to the other, lie sometimes in very opposite directions. In many governments, the candidates for the highest stations are above the law; and, if they can attain the object of their ambition, they have no fear of being called to account for the means by which they acquired it. They often endeavor, therefore, not only by fraud and falsehood, the ordinary and vulgar arts of intrigue and cabal; but sometimes by the perpetration of the most enormous crimes, by murder and assassination, by rebellion and civil war, to supplant and destroy those who oppose or stand in the way of their greatness. They more frequently miscarry than succeed; and commonly gain nothing but the disgraceful punishment which is due to their crimes. Though they should be so lucky as to attain that wishedfor greatness, they are always most miserably disappointed in the happiness Book IV. The French Revolution and the Industrial Revolution,

35 PART II. Merit and Demerit or Reward and Punishment: Sec. I, Chapter IV. Recapitulation: (i) We do not thoroughly and heartily sympathize with the gratitude of one man towards another, merely because this other has been the cause of his good fortune, unless he has been the cause of it from motives which we entirely go along with. Our heart must adopt the principles of the agent, and go along with all the affections which influenced his conduct, before it can entirely sympathize with, and beat time to, the gratitude of the person who has been benefited by his actions. (ii) In the same manner, we cannot at all sympathize with the resentment of one man against another, merely because this other has been the cause of his misfortune, unless he has been the cause of it from motives which we cannot enter sufferer, we must disapprove of the motives of the agent, and feel that our heart renounces all sympathy with the affections which influenced his conduct. If there appears to have been no impropriety in these, how fatal so ever the tendency of the action, which proceeds from them, to those against whom it is directed, it does not seem to deserve any punishment, or to be the proper object of any resentment. 73 Section II. Justice and Beneficence, Chapter III. The utility of this constitution of nature: As society cannot subsist unless the laws of justice are tolerably observed, as no social intercourse can take place among men who do not generally abstain from injuring one another; the consideration of this necessity, it has been thought, was the ground upon which we approved of the enforcement of the laws of justice, by the punishment of those who violated them. Man, it has been said, has a natural love for society, and desires that the union of mankind should be preserved for its own sake, and though he himself was to derive no benefit from it. The orderly and flourishing state of society is agreeable to him, and he takes delight in contemplating it. Its disorder and confusion, on the contrary, is the object of his aversion, and he is chagrined at whatever tends to produce it. He is sensible too, that his own interest is connected with the prosperity of society, and that the happiness, perhaps the preservation of his existence, depends upon its preservation. Upon every account, therefore, he has an abhorrence at whatever can tend to destroy society, and is willing to make use of every means, which can hinder so hated and so dreadful an event. Injustice necessarily tends to destroy it. Every appearance of injustice, therefore, alarms him, and he runs, if I may say so, to stop the progress of what, if allowed to go on, would quickly put an end to everything that is dear to him. If he cannot restrain it by gentle and fair means, he must bear it down by force and violence, and at any rate must put a stop to its further progress. Hence it is, they say, that he often approves of the enforcement of the laws of justice, even by the capital punishment of those who violate them. The disturber of the public peace is hereby removed out of the world, and others are terrified by his fate from imitating this example. 74 PART III. The Foundation of our Judgments: Chapter I. The principle of self-approbation and of self-disapprobation: The principle by which we naturally either approve or disapprove of our own conduct, seems to be altogether the same with that, by which we exercise the like judgments concerning the conduct of other people. We either approve or disapprove of the conduct of another man, according as we fell what, when we bring his case home to ourselves, we either can or cannot entirely sympathize with the sentiments and motives which directed it. And, in the same manner, we either approve or disapprove of our own conduct, according as we feel that, when we place ourselves in the situation of another man, and view it, as it were, with his eyes and from his situation, we either can or cannot entirely enter into and sympathize with the sentiments and motives which influenced it. 75 Chapter V. The influence and authority of the general rules of morality: (i) The regard to those general rules of conduct, is what is properly called a sense of duty, a principle of the greatest consequence in human life, and the only principle by which the bulk of mankind are capable of directing their actions. Many men behave very decently, and through the whole of their lives avoid any consider-able degree of blame, who yet, perhaps, never felt the Book IV. The French Revolution and the Industrial Revolution,

36 sentiment upon the propriety of which we found our approbation of their conduct, but acted merely from a regard to what they saw were the established rule of behavior. (ii) Since these were plainly intended to be the governing principles of human nature, the rules which they prescribe are to be regarded as the commands and laws of the Deity, promulgated by those vicegerents which he has thus set up within us. All general rules are commonly denominated laws: thus the general rules which bodies observe in the communication of motion, are called the laws of motion. But those general rules, which our moral faculties observe in approving or condemning whatever sentiment or action is subjected to their examination, may justly be denominated such. 76 Chapter VI. In what cases the sense of duty ought to be the sole principle of our conduct: In what cases our actions ought to arise chiefly or entirely from a sense of duty, or from a regard to general rules; and in what cases some other sentiment or affection ought to concur, and have a principal influence. The decision of this question will depend upon two different circumstances. (i) It will depend upon the natural agreeableness or deformity of the affection itself, how far our actions ought to arise from it, or entirely proceed from a regard to the general rule. All those graceful and admired actions, to which the benevolent affections would prompt us, ought to proceed as much from the passions themselves, as from any regard to the general rules of conduct. As the selfish passions hold a sort of middle place, between the social and unsocial affections, so do they likewise in this. The pursuit of the objects of private interest ought to flow rather from a regard to the general rules which prescribe such conduct, than from any passion for the objects themselves; but upon more important and extraordinary occasions, we should be awkward, insipid, and ungraceful, if the objects themselves did not appear to animate us with a considerable degree of passion. It is quite otherwise with regard to the more extraordinary and important objects of self-interest. The spirit and keenness constitutes the difference between the man of enterprise and the man of dull regularity. Those great objects of self-interest are the objects of the passion properly called ambition; a passion which, when it keeps within the bounds of prudence and justice, is always admired in the world, and has even sometimes a certain irregular greatness, which dazzles the imagination, when it passes the limits of both these virtues, and is not only unjust but extravagant. (ii) It will depend partly upon the precision and exactness, or the looseness and inaccuracy of eth general rules themselves, how far our conduct ought to proceed entirely from a regard to them. The general rules of almost all the virtues, the general rules which determine what are the offices of prudence, of charity, of generosity, of gratitude, of friendship, are in many respects loose and inaccurate, admit of may exceptions, and require so many modifications, that it is scarce possible to regulate our conduct entirely by a regard to them. The common proverbial maxims of prudence, being founded in universal experience, are perhaps the best general rule which can be given about it. To affect, however, a very strict and literal adherence to them, would evidently be the most absurd and ridiculous pedantry. However, one virtue, of which the general rules determine, requires the greatest exactness. This virtue is justice: the rule of justice are accurate in the highest degree, and admit of no exceptions of modifications. 77 PART. IV. The Effect of Utility upon the sentiment of approbation: Chap. I. The beauty which the appearance of utility bestows upon all the productions of art, and of the extensive influence of this species of beauty. That utility is one of the principal sources of beauty has been observed by everybody, who had considered with any attention what constitutes the nature of beauty. The convenience of a house gives pleasure to the spectator as well as its regularity, and he is as much hurt when he observes the contrary defect, as when he sees the correspondent windows of different forms, or the door not placed exactly in the middle of the building. Ch. II. The beauty which the appearance of utility bestows upon the characters and actions of men; and how far the perception of this beauty may be regarded as one of the original principles of approbation Book IV. The French Revolution and the Industrial Revolution,

37 PART V. The Influence of Custom and Fashion upon the sentiments of moral approbation and disapprobation: Chapter I. The influence of custom and fashion upon our notions of beauty and deformity. Ch. II. The influence of custom and fashion upon moral sentiments: The different situations of different ages and countries are apt, in the same manner, to give different characters to the generality of those who live in them, and their sentiments concerning the particular degree of each quality, that is either blamable or praiseworthy, vary, according to that degree which is usual in their own country, and in their own times. Among civilized nations, the virtues which are founded upon humanity are more cultivated than those which are founded upon self-denial and the command of the passions. Among rude and barbarous nations, it is quite otherwise, the virtues of self-denial are more cultivated than those of humanity. The general security and happiness which prevail in ages of civility and politeness, afford little exercise to the contempt of danger, to patience in enduring labor, hunger, and pain. Poverty may easily be avoided, and the contempt of it, therefore, almost ceases to be a virtue. The abstinence from pleasure becomes less necessary, and the mind is more at liberty to unbend itself, and to indulge its natural inclinations in all those particular respects. Among savages and barbarians, it is quite otherwise. Every savage undergoes a sort of Spartan discipline, by the necessity of his situation, is inured to every sort of hardship. 79 PART VI. The Character of Virtue: Section II, Ch. III. Universal Benevolence: The wise and virtuous man is, at all times, willing that his own private interest should be sacrificed to the public interest of his own particular order or society. He is willing that the interest of this order or society should be sacrificed to the greater interest of the state or sovereignty, of which it is only a subordinate part: he should, therefore, be equally willing that all those inferior interests should be sacrificed to the greater interest of the universe, to the interest of that great society of all sensible and intelligent beings, of which God himself is the immediate administrator and director. If he is deeply impressed with the habitual and thorough conviction, that this benevolent and all-wise being can admit into the system of his government no partial evil, which is not necessarily for the universal good, he must consider all the misfortunes which may befall himself, his friends, his society, or his country, as necessary for the prosperity of the universe, and, therefore, as what he ought, not only to submit to with resignation, but as what he himself, if he had known all the connections and dependencies of things, ought sincerely and devoutly to have wished for. 80 Section III. Self-Command: The wise and virtuous man directs his principal attention to the first standard; the idea of exact propriety and perfection. There exists in the mind of every man, an idea of this kind gradually formed from his observations upon the character and conduct both of himself and of other people. It is the slow, gradual, and progressive work of the great demi-god within the breast, the great judge and arbiter of conduct. In the wise and virtuous man, they have been made with the most acute and delicate sensibility, and the utmost care and attention have been employed in making them. 81 Conclusion of Part VI: Concern for our own happiness recommends to us the virtue of prudence; concern for that of other people, the virtues of justice and beneficence; of which, the one restrains us from hurting, the other prompts us to promote that happiness. Though the virtues of prudence, justice, and beneficence, may, upon different occasions, be recommended to us almost equally by two different principles; those of self-command are upon most occasions, principally and almost entirely recommended to us by one; by the sense of propriety, by regard to the sentiments of the supposed impartial spectator. Without the restraint which this principle imposes, every passion would, upon most occasions, rush headlong to its own gratification. In our approbation of the virtues of self-command, complacency with their effects sometimes constitutes no part, and frequently but a small part, of that approbation. Those effects may sometimes be agreeable, and sometimes disagreeable; and though our approbation is no doubt stronger in the former case, it is by means altogether destroyed in the latter. 82 Book IV. The French Revolution and the Industrial Revolution,

38 PART VII. Systems of Moral Philosophy: Section III, Chapter I. Those systems deducing the Principles of Approbation from Self-Love: (i) According to Hobbes, society becomes necessary to him, and whatever tends to its support and welfare, he considers as having a remote tendency to his own interest; and, on the contrary, whatever is likely to disturb or destroy it, he regards as in some measure hurtful or pernicious to himself. Virtue is the great support, and vice the great disturber, of human society. The former is agreeable, the latter offensive, to every man; as from the one he foresees the prosperity, and from the other the ruin and disorder, of what is so necessary for the comfort and security of his existence. (ii) Sympathy cannot be regarded as a selfish principle. When I sympathize with your sorrow or your indignation, it may be pretended, that my emotion is founded in self-love, because it arises from bringing your case home to myself, from putting myself in your situation, thence conceiving what I should feel in the like circumstances. 83 Chapter II. Those systems making Reason the Principles of Approbation: (i) According to Hobbes, a state of nature is a state of war; and that antecedent to the institution of civil government, there could be no safe or peaceable society among men. Therefore, to preserve society was to support civil government, and to destroy civil government was the same thing as to put an end to society. But the existence of civil government depends upon the obedience that is paid to the supreme magistrate. The moment he loses his authority, all government is at an end. As selfpreservation, therefore, teaches men to applaud whatever tends to promote the welfare of society, and to blame whatever is likely to hurt it; so the same principle ought to teach them to applaud, upon all occasions, obedience to the civil magistrate, and to blame all disobedience and rebellion. (ii) That virtue consists in conformity to reason, is true in some respects; and this faculty may very justly be considered as, in some sense, the source and principle of approbation and disapprobation, and of all solid judgments concerning right and wrong. It is by reason that we discover those general rules of justice by which we ought to regulate our actions; and it is by the same faculty that we form those more vague and indeterminate ideas of what is prudent, of what is decent, of what is generous or noble, which we carry constantly abut with us, and according to which we endeavor, as well as we can, to model the tenor of our conduct. The general maxims of morality are formed, like all other general maxims, from experience and induction. 84 Section IV. The Manner treating of the Practical Rules of Morality: The rules of justice are the only rules of morality which are precise and accurate, while all the other virtues are loose, vague, and indeterminate. (i) Among all the ancient moralists, the first have contented themselves with describing, in a general manner, the different vices and virtues, and with pointing out the deformity and misery of the one disposition, we well as the propriety and happiness of the other, but have not affected to lay down many precise rules, that are to hold good unexceptionably in all particular cases. (ii) The second set of moralists, among whom we may count all the casuist of the middle and latter ages of the Christian church, as well as all those who, in this and in the preceding century, have treated of what is called natural jurisprudence, do not content themselves with characterizing, in this general manner, that tenor of conduct which they would recommend to us, but endeavor to lay down exact and precise rules for the direction of every circumstance of our behavior. As justice is the only virtue with regard to which such exact rules can properly be given, it is this virtue that has chiefly fallen under the consideration of those two different sets of writers. They treat of it, however, in a very different manner. (iii) The breaches of moral duty were chiefly of three different kinds. First, breaches of the rules of justice: the violation of them is naturally attended with the consciousness of deserving, and the dread of suffering, punishment both from God and man. Secondly, breaches of the rules of charity are real breaches of the rules of justice. Thirdly, breaches of the rules of veracity are the violation of truth: the vice of common lying may frequently do hurt to nobody; no claim of vengeance can be imposed to the persons Book IV. The French Revolution and the Industrial Revolution,

39 An Inquiry into the Nature and Causes of the Wealth of Nations (1776): It consists of five books. BOOK I. Production and Distribution: Chapter I. The Division of Labor: The greatest improvement in the productive powers of labor, and the greater part of the skill, dexterity, and judgment with which it is anywhere directed, or applied, seem to have been the effects of the division of labor. The effects of the division of labor, in the general business of society, will be more easily understood, by considering in what manner it operates in some particular manufactures. By taking an example of pin-making, with a great increase of the quantity of work, Smith considers three beneficial effects of the division of labor: improvement of worker s skill and dexterity; saving of time lost in passing from one sort of work to another; and invention of machinery which facilitates and abridges labor. The specialization brings the great multiplication of productions in firms and industries. Chapter II. The Principle giving Occupation to the Division of Labor: The division of labor arises originally from the slow and gradual consequence of a propensity in human nature, the propensity to truck, barter, and exchange one things for another, and it is limited by the extent of the market. The greater part of occasional wants are supplied by treaty, by barter, and by purchase. The certainty of being able to exchange all that surplus part of the produce of his own labor, which is over and above his own consumption, for such parts of the produce of other men s labor as he may have occasion for, encourages every man to apply himself to a particular occupation and to cultivate and bring to perfection whatever talent of genius he may possess for that particular business. The difference of natural talents in different men is much less than we are aware of; and the very different genius which appears to distinguish men of different professions, is not upon many occasion so much the cause, as the effect of the division of labor. Among men, the most dissimilar geniuses are of use to one another; the different produces of their respective talents, by the general disposition to truck, barter, and exchange, being brought into a common stock, where every man may purchase whatever part of the produce of other s talents. 86 Chapter III. The Division of Labor is Limited by the extent of the market: As it is the power of exchanging that gives occasion to the division of labor, so the extent of this division must always be limited by the extent of that power, or, in other words, by the extent of the market. When the market is very small, no person can have any encouragement to dedicate himself entirely to one employment, for want of the power to exchange all that surplus part of the produce of his own labor, which is over and above his own consumption, for such part of the produce of other men s labor as he has occasion for. 87 Chapter IV. The Origin and Use of Money: When the division of labor has been once thoroughly established, it is but a very small part of a man s wants which the produce of his own labor can supply. He supplies the far greater part of them by exchanging that surplus part of the produce of his own labor, which is over and above his own consumption, for such parts of the produce of other men s labor as he has occasion for. Every man thus lives by exchanging, or becomes a merchant, and the society itself grows to be a commercial society. Therefore, the common instrument of commerce was necessary for exchange, and precious metals became favorable. Those metals seem originally to have been made use of for this purpose in rude bars, without any stamp or coinage. But to prevent abuses, to facilitate exchanges, and thereby to encourage all sorts of industry and commerce; it has been necessary in all countries to affix a public stamp upon certain quantities of such particular metals, as were in those countries commonly made use of to purchase goods. The denominations of those coins seem originally to have expressed the weight or quantity of metal contained in them. The word value has two different meanings: sometimes expresses the utility of some particular object value in use, and sometimes the power of purchasing other goods which the possession of that object conveys value in exchange. The real measure of exchange value, the different parts of real prices, and the circumstances or causes hindering market prices are discussed in the following chapters. 88 Book IV. The French Revolution and the Industrial Revolution,

40 Chapter V. The Real and Nominal Price of Commodities: The value of any commodity to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of labor which it enable him to purchase or command. Therefore, labor is the real measure of the exchangeable value of all commodities. What is bought with money or with goods is purchased by labor, as much as what we acquire by the toil of our own body. They contain the value of a certain quantity of labor which we exchange for what is supposed at the time to contain the value of an equal quantity. Labor was the first price, the original purchase-money that was paid for all things. It was not by gold or by silver, but by labor, that all the wealth of the world was originally purchased; and its value, to those who possess it, and who want to exchange it for some new productions, is precisely equal to the quantity of labor which it can enable them to purchase or command. However, the exchangeable value of every commodity is more frequently estimated by the quantity of money, than by the quantity either of labor or of any other commodity which can be had in exchange for it. Labor alone, never varying in its own value, is alone the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared. It is their real price; money is their nominal price only. Therefore, labor is the only universal, as well as the only accurate measure of value, or the only standard by which we can compare the values of different commodities at all times and at all places. Money is the exact measure of the real exchangeable value of all commodities, at the same time and place only. The occasional fluctuations in the market price of gold and silver bullion arise from the same causes as the like fluctuations in that of all other commodities. By the money price of goods, it is to be observed, I understand always the quantity of pure gold or silver for which they are sold, without any regard to the denomination of the coin. 89 Chapter VI. The Component Parts of the Price of Commodities: In the early and rude state of society which precedes both the accumulation of stock and the appropriation of land, the proportion between the quantities of labor necessary for acquiring different objects seems to be the only circumstance which can afford any rule for exchanging them for one another. As soon as stock has accumulated in the hands of particular persons, some of them will naturally employ it in setting to work industrious people, whom they will supply with materials and subsistence, in order to make a profit by the sale of their work, or by what their labor adds to the value of the materials. The value which the workmen add to the materials can be in two parts: wages and the profits of their employers. The profits of stock, it may perhaps be thought, are only a different name for the wages of a particular sort of labor, the labor of inspection and direction. In this regard, the whole produce of labor does not always belong to the laborer; he must share it with the owner of the stock which employs him. As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for tis natural produce. The wood of the forest, the grass of the field, and all the natural fruits of the earth, which, when land was in common, cost the laborer only the trouble of gathering them, come, even to him, to have an additional price fixed upon them. The real value of all the different component parts of price is measured by the quantity of labor which they can, each of them, purchase or command. Labor measures the value not only of that part of price which resolve itself into labor, but of that which resolves itself into rent, and of that which resolve itself into profit. In every society the price of every commodity finally resolves itself into three parts: wages, rent, and profit. For example, in the price of corn, one part pays the rent of the landlord, another pays the wages or maintenance, and the third pays the profit of the farmer. A fourth part is necessary for replacing the stock of the farmer, or for compensating the wear and tear of his laboring cattle, and other instruments of husbandry. Thus, wages, profits, and rent, are the three original sources of all revenue as well as of all exchangeable value Book IV. The French Revolution and the Industrial Revolution,

41 Chapter VII. The Natural and Market Price of Commodities: There is in every society or neighborhood an ordinary or average rate both of wages and profit in every different employment of labor and stock. This rate is naturally regulated, partly by general circumstances of the society, their riches or poverty, their advancing, stationary, or declining condition; and partly by the particular nature of each employment. There is likewise in every society or neighborhood an ordinary or average rate of rent, which is regulated, partly by the general circumstances of the society or neighborhood in which the land is situated, and partly by the natural or improved fertility of the land. These ordinary or average rates may be called the natural rates of wages, profit, and rent, at the time and place in which they commonly prevail. The actual price at which any commodity is commonly sold is called its market price. It may either be above, or below, or exactly the same with its natural price. The market price of every particular commodity is regulated by the proportion between the quantity which actually brought to market, and the demand of those who are willing to pay the natural price of the commodity, to the whole value of the rent, labor, and profit, which must be paid in order to bring it thither. The quantity of every commodity brought to market naturally suits itself to the effectual demand. If at any time it exceeds the effectual demand, some of the component parts of its price must be paid below their natural rate. On the contrary, the opposite would appear. Therefore, the natural price is the central price, to which the prices of all commodities are continually gravitating. The occasional and temporary fluctuations in the market price of any commodity fall chiefly upon those parts of its price which resolve themselves into wages and profits. Such fluctuations affect both the value and the rate either of wages or of profit, according as the market happens to be either over-stocked or under-stocked with commodities or with labor; with work done, or with work to be done. A monopoly granted wither to an individual or to a trading company has the same effect as a secret in trade or manufactures; in which wages and profits were greatly above their natural rate. 91 Chapter VIII. The Wages of Labor: What are the common wages of labor, depends everywhere upon the contract usually made between those two parties, whose interests are by no means the same. The workmen desire to get as much, the masters to give as little as possible. The most decisive mark of the prosperity of any country is increase of the number of its inhabitants. The liberal reward of labor, therefore, as it is the effect, so it is the natural symptom of increasing national wealth. In Great Britain, the wages of labor shows many plain symptoms: there is a distinction, even in the lowest species of labor, between summer and winter wages; the wages of labor do not fluctuate with the price of provisions; the wages of labor vary more from place to place than the price of provisions; the variations in the price of labor not only do not correspond either in place or time with those in the price of provisions, but they are frequently quite opposite. The liberal reward of labor increases the industry of the common people. The wages of labor are the encouragement of industry, which, like every other human quality, improves in proportion to the encouragement it receives. Where wages are high, we shall always find the workmen more active, diligent, and expeditious, than where they are low. The increase in the wages of labor necessarily increases the price of many commodities, by increasing that part of it which resolves itself into wages, and so far tends to diminish their consumption both at home and abroad. The same cause, however, which raises the wages of labor, the increase of stock, tends to increase its productive powers, and to make a smaller quantity of labor produce a greater quantity of work. The greater their number, the more they naturally divide themselves into different classes and subdivisions of employment. More heads are occupied in inventing the most proper machinery for executing the work of each, and it is, therefore, more likely to be invented. There are many commodities, which, in consequence of these improvements, come to be produced by so much less labor than before, that the rising price is more than compensated by the falling quantity. 92 Book IV. The French Revolution and the Industrial Revolution,

42 Chapter IX. The Profit of Stock: The rise and fall in the profits of stock depend upon the same causes with the rise and fall in the wages of labor, the increasing or declining state of the wealth of the society; but those causes affect the one and the other very differently. The increase of stock, which raises wages, tends to lower profit. When the stocks of many rich merchants are turned into the same trade, their mutual competition naturally tends to lower its profit; and when there is a like increase of stock in all the different trades carried on in the same society, the same competition must produce the same effect in them all. In our North American and West Indian colonies, not only the wages of labor, but the interest of money, and consequently the profits of stock, are higher than in England. The acquisition of new territory, or of new branches of trade, may sometimes raise the profits of stock, and with them the interest of money, even in a country which is fast advancing in the acquisition of riches. The diminution of the capital stock of the society, or of the funds destined for the maintenance of industry, however, as it lowers the wages of labor, so it raises the profits of stock, and consequently the interest of money. The lowest ordinary rate of profit must always be something more than what is sufficient to compensate the occasional losses to which every employment of stock is exposed. The highest ordinary rate of profits may be such as, in the price of the greater part of commodities, eat up the whole of what should go to the rent of the land, and leaves only what is sufficient to pay the labor of preparing and bringing them to market, according to the lowest rate at which labor can anywhere be paid, the bare subsistence of the labor. The proportion which the usual market rate of interest ought to bear to the ordinary rate of clear profit, necessarily varies as profit rises or falls. But the proportion between interest and clear profit might not be the same in countries where the ordinary rate of profit was either a good deal lower, or a good deal higher. In reality, high profits tend much more to raise the price of work than high wages. The rise of profit operates like compound interest. 93 Chapter X. Wages and Profit in the different employments of labor and stock: The whole of the advantages and disadvantages of the different employments of labor and stock must, in the same neighborhood, be either perfectly equal or continually tending to equality. In the same neighborhood, there was any employment evidently either more or less advantageous than the rest, so many people would crowd into it in the one case, and so many would desert it in the other; that its advantages would soon return to the level of other employments. [Part I] Inequalities arises from the nature of the employments themselves. First, the wages of labor vary with the ease or hardship, the cleanliness or dirtiness, the honorableness or dishonorableness of the employment. Secondly, the wages of labor vary with the easiness and cheapness, or the difficulty and expense of learning the business. Thirdly, the wages of labor in different occupations vary with the constancy or inconstancy of employment. Fourthly, the wages of labor vary according to the small or great trust which must be reposed in the workmen. Fifthly, the wages of labor in different employments vary according to the probability or improbability of success in them. Of the five circumstances, varying the wages of labor, two only affect the profits of stock: the agreeableness or disagreeableness of the business; and the risk or security with which it is attended. In reality, they make up for a small pecuniary gain in some, and counter-balance a great one in others. In order, however, that this equality may take place in the whole of their advantages or disadvantages, three thing are requisite even where there is the most perfect freedom. Frist, this equality can take place only in those employments which are well known, and have been long established in the neighborhood. Secondly, this equality in the whole of the advantages and disadvantages of the different employments of labor and stock, can take place only in the ordinary, or what may be called the natural state of those employments. Third, this equality in the whole of the advantages and disadvantages of the different employments of labor and stock, can take place only in such as are the sole or principal employments of those who occupy them Book IV. The French Revolution and the Industrial Revolution,

43 [Part II] Inequalities occasioned by the policy of Europe: Such are the inequalities in the whole of the advantages and disadvantages of the different employment of labor and stock, which the defect of any of the three requisites above-mentioned must occasion, even where there is the most perfect liberty. But the policy of Europe, by not leaving things as perfect liberty, occasions other inequalities of much greater importance. It does this chiefly in the three following ways. First, the policy of Europe occasions a very important inequality in the whole of the advantages and disadvantages of the different employments of labor and stock, by restraining the competition in some employments to a smaller number than might otherwise be disposed to enter into them. Secondly, the policy of Europe, by increasing the competition in some employments beyond what it naturally would be, occasions another inequality of an opposite kind in the whole of the advantages and disadvantages of the different employments of labor and stock. Thirdly, the policy of Europe, by obstructing the free circulation of labor and stock both from employment to employment, and from place to place, occasions in some cases a very inconvenient inequality in the whole of the advantages and disadvantages of their different employments. Finally, the proportion between the different rates both of wages and profit in the different employments of labor and stock, seems not to be much affected, as has already been observed, by the riches or poverty, the advancing, stationary, or declining state of the society. Such revolutions in the public welfare, though they affect the general rates both of wages and profit, must in the end affect them equally in all different employments. The proportion between them, therefore, must remain the same, and cannot well be altered, at least for any considerable time, by any such revolutions. 95 Chapter XI. The Rent of Land: Every improvement in the circumstances of the society tends either directly or indirectly to raise the real rent of land, to increase the real wealth of the landlord, his power of purchasing the labor, or the produce of the labor of other people. The extension of improvement and cultivation tends to raise it directly. The landlord s share of the produce necessarily increases with the increase of the produce. The rise in the real price of those parts of the rude produce of land, which is the first effect of extended improvement and cultivation, and afterwards the cause of their being still further extended, the rise in the price of cattle, for example, tend to raise the rent of land directly. The real value of the landlord s share, his real command of the labor of other people, not only rises with the real value of the produce, but the proportion of his share to the whole produce rises with it. All improvements in the productive powers of labor, which tend directly to reduce the real price of manufactures, tend indirectly to raise the real rent of land. The landlord exchanges that part of his rude produce. Every increase in the real wealth of the society, every increase in the quantity of useful labor employed within it, tends indirectly to raise the real rent of land. A certain proportion of this labor naturally goes to the land. A greater number of men and cattle are employed in its cultivation, the produce increases with the increase of the stock which is thus employed in raising it, and the rent increases with the produce. The contrary circumstances, the neglect of cultivation and improvement, the fall in the real price of any part of the rude produce of land; the rise in the real price of manufactures from the decay of manufacturing art and industry, the declension of the real wealth of the society, all tend, on the other hand, to lower the real rent of land, to reduce the real wealth of the landlord, to diminish his power of purchasing either the labor, or the produce of the labor of other people. The whole annual produce of the land and labor of every country, or what comes to the same thing, the whole price of that annual produce, naturally divides itself, it has already been observed, into three parts: the rent of land, the wages of labor, and the profits of stock; and constitutes a revenue to three different orders of people; to those who live by rent, to those who live by wages, and to those who live by profit. These are the three great, original and constituent orders of every civilized society, from whose revenue that of every other order is ultimately derived. 96 Book IV. The French Revolution and the Industrial Revolution,

44 The whole annual produce of the land and labor of every country naturally divides itself into three parts: the rent of land, the wages of labor, and the profits of stock. The interest of the first of those three great orders, it is strictly and inseparably connected with the general interest of the society. Whatever either promotes or obstructs the one, necessarily promotes or obstruct the other. When the public deliberates concerning any regulation of commerce or police, the proprietor of land never can misled it, with a view to promote the interest of their own particular order, at least, if they have any tolerable knowledge of that interest. They are the only one of the three orders whose revenue costs them neither labor nor care, but comes to them, as it were, of its own accord, and independent of any plan or project of their own. The interest of the second order, that of those who live by wages, is as strictly connected with the interest of the society as that of the first. The wages of the laborer are never so high as when the demand for labor is continually rising, or when the quantity employed is every year increasing considerably. When this real wealth of the society becomes stationary, his wages are soon reduced to what is barely enough to enable him to bring up a family, or to continue the race of laborers. When the society declines, they fall even below this. The third order lives by profit. It is the stock that is employed for the sake of profit, which puts into motion the greater part of the useful labor of every society. The plans and projects of the employers of stock regulate and direct all the most important operations of labor, and profit is the end proposed by all those plans and projects. Merchants and master manufacturers are, in this order, the two classes of people who commonly employ the largest capitals, and who by their wealth draw to themselves the greatest share of the public consideration. To widen the market and to narrow the competition, is always the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy absurd tax upon the rest of their fellow-citizens. 97 BOOK II. The Nature, Accumulation, and Employment of Stock: In the rude state of society, it is not necessary that any stock should be accumulated or stored up beforehand, in order to carry on the business of the society. But when the division of labor has once been thoroughly introduced, the produce of a man s own labor can supply but a very small part of this occasional wants. The far greater part of them are supplied by the produce of other men s labor, which he purchases with the produce, or, what is the same thing, with the rice of the produce of his own. As the accumulation of stock must, in the nature of things, be previous to the division of labor, so labor can be more and more subdivided in proportion only as stock is previously more and more accumulated. The quantity of materials which the same number of people can work up, increases in a great proportion as labor comes to be more and more subdivided, and as the operations of each workman are gradually reduced to a greater degree of simplicity, a variety of new machines come to be invested for facilitating and abridging those operations. As the division of labor advances, therefore, in order to give constant employment to an equal number of workmen, and equal stock of provisions, and a greater stock of materials and tools than what would have been necessary in the ruder state of things, must be accumulated beforehand. But the number of workmen in every branch of business generally increases with the division of labor in that branch, or rather it is the increase of their number which enables them to class and subdivide themselves in this manner. As the accumulation of stock is previously necessary for carrying on this great improvement in the productive powers of labor, so that accumulation naturally leads to this improvement. The person who employs his stock in maintaining labor, necessarily wishes to employ it in such a manner as to produce as great a quantity of work as possible. He endeavors, therefore, both to make among his workmen the most proper distribution of employment, and to furnish them with the best machines which he can either invent or afford to purchase Book IV. The French Revolution and the Industrial Revolution,

45 Chapter I. The Division of Stock: The general stock of any country or society is the same with that of all its inhabitants or members, and therefore naturally divides itself into the same three portions. The first is reserved for immediate consumption, that it affords no revenue or profit. It consists in the stock of food, clothes, household furniture, etc., which have been purchased by their proper consumers, but which are not yet entirely consumed. The second of the three portions into which the general stock of the society divides itself, is the fixed capital, which consists chiefly of the four following articles: (i) of all useful machines and instruments of trade which facilitate and abridge labor; (ii) of all those profitable building which are the means of procuring a revenue, not only to their proprietor who lets them for a rent, but to the person who possesses them and pays that tent for them; (iii) of the improvements of land, of what has been profitably laid out in clearing, draining, enclosing, manuring, and reducing it into the condition most proper for tillage and culture; and (iv) of the acquired and useful abilities of all the inhabitants or members of the society. The acquisition of such talents, by the maintenance of the acquirer during his education, study, or apprenticeship, always costs a real expense, which is a capital fixed and realized, as it were, in his person. The third and last of the three portions into which the general stock of the society naturally divides itself, is the circulating capital that is composed of four parts: (i) of the money by means of which all the other three are circulated and distributed to their proper consumers; (ii) of the stock of provisions which are in the possession of the butcher, the grazier, the farmer, the corn-merchant, the brewer, etc. and from the sale of which they expect to derive a profit; (iii) of the materials, whether altogether rude, or more or less manufactured, or clothes, furniture and building, which are not yet made up into any of those three shapes, but which remain in the hands of the growers, the manufacturers, the mercers, and drapers, and so on; (iv) of the work which is made up and completed, but which is still in the hands of the merchant or manufacturer, and not yet disposed of or distributed to the proper consumers. 99 Chapter II. Money considered as a particular branch of the General Stock of the Society, or the expense of maintaining the national capital: The whole price or exchangeable value of the annual produce must resolve itself into the three parts, and be parceled out among the different inhabitants of the country, either as the wages of their labor, the profits of their stock, or the rent of their land. The gross revenue of all the inhabitants of a country, comprehends the whole annual produce of their land and labor; the neat revenue, what remains free to them after deducting the expense of maintaining; as noted in Chapter I including fixed capital, circulating capital; and stock reserved for immediate consumption. Money is the only part of the circulating capital of a society, of which the maintenance can occasion any diminution in their neat revenue. The fixed capital, and part of the circulating capital which consists in money, so far as they affect the revenue of the society, bear a very great resemblance to one another. First, those machines and instruments of trade, etc., require a certain expense, which are deductions from the neat revenue of the society. Secondly, the machines and instruments of trade, etc. composing the fixed capital, either of an individual or of a society, make no part either of the gross or of the neat revenue of either; so money, by means of which the whole revenue of the society is regularly distributed among all its different members, makes itself no part of that revenue. Thirdly, and lastly, the machines and instruments of trade, etc. composing the fixed capital bear this further resemblance to that part of the circulating capital which consists in money; that as every saving in the expense of erecting and supporting those machines, which does not diminish the productive powers of labor, is an improvement of the neat revenue of the society; so every saving in the expense of collecting and supporting that part of the circulating capital which consists in money, is an improvement of exactly the same kind. It is sufficiently obvious, in what manner every saving in the expense of supporting the fixed capital is an improvement of the neat revenue of the society. 100 Book IV. The French Revolution and the Industrial Revolution,

46 The substitution of paper in the room of gold and silver money, replaces a very expensive instrument of commerce with one much less costly, and equally convenient. Circulation comes to be carried on by a new wheel, which it costs less both to erect and to maintain than the old one. There are several different sorts of paper money; but the circulating notes of banks and bankers are the species which is best known, and which seems best adapted for this purpose. When the people of any particular country have such confidence in the fortune, probity, and prudence of a particular banker, as to believe that he is always ready to pay upon demand such of his promissory notes as are likely to be at any time presented to him; those notes come to have the same currency as gold and silver money, from the confidence that such money can at any time be had for them. A particular banker lends among his customers his own promissory notes, to the extent. As those notes serve all the purposes of money, his debtors pay him the same interest as if he had lent them so much money. This interest is the source of his gain. Though some of those notes are continually coming back upon him for payment, part of them continue to circulate for months and years together. When paper is substituted in the room of gold and silver, the quantity of the materials, tools, and maintenance, which the whole circulating capital can supply, may be increased by the whole value of gold and silver which used to be employed in purchasing them. The whole value of the great wheel of circulation and distribution, is added to the goods which are circulated and distributed by means of it. It is chiefly by discounting bills of exchange, that is, by advancing money upon them before they are due, that the greater part of banks and bankers issue their promissory notes. Moreover, they invented another method of issuing their promissory noted; by granting, what they called cash accounts that is by giving credit to the extent of a certain sum, to any individual who could procure two persons of undoubted credit and good landed estate to become surety for him, that whatever money should be advanced to him, within the sum for which the credit had been given, should be repaid upon demand, together with the legal interest. 101 The whole paper money of every kind which can easily circulate in any country never can exceed the value of the gold and silver, of which it supplies the place, or which would circulate there, if there was no paper money. Though paper money should be pretty much confined to the circulation between dealers and dealers, yet banks and bankers might still be able to give nearly the same assistance to the industry and commerce of the country, as they had done when paper money filled almost the whole circulation. The increase of paper money, it has been said, by augmenting the quantity, and consequently diminishing the value of the whole currency, necessarily augments the money price of commodities. But as the quantity of gold and silver, which is taken from the currency, is always equal to the quantity of paper which is added to it, paper money does not necessarily increase the quantity of the whole currency. A paper currency which falls below the value of gold and silver, does not thereby sink the value of those metals, or occasion equal quantities of them to exchange for a smaller quantity of goods of any other kind. The proportion between the value of gold and silver and that of goods of any other kind, depends in all cases, not upon the nature or quantity of any particular paper money, which may be current in any particular country, but upon the richness or poverty of the mines, which happen at any particular time to supply the treat market of the commercial world with those metals. It depends upon the proportion between the quantity of labor which is necessary in order to bring a certain quantity of gold and silver to market, and that which is necessary in order to bring thither a certain quantity of any other sort of goods. If bankers are restrained from issuing any circulating bank notes, or notes payable to the bearer, for less than a certain sum; and if they are subjected to the obligation of an immediate and unconditional payment of such bank notes as soon as presented, their trade may, with safety to the public, be rendered in all other respects perfectly free. This free competition obliges all bankers to be more liberal in their dealings with their customers Book IV. The French Revolution and the Industrial Revolution,

47 Chapter III. The Accumulation of Capital, or Productive and Unproductive Labor: There are two sorts of labor: productive and unproductive labor. The productive labor produces value: the labor of a manufacturer adds to the value of the materials which he works upon, that of his own maintenance, and of his master s profit. On the contrary, the unproductive labor produces no value: the labor of a menial servant adds to the value of nothing; and the sovereign, with all the officers both of justice and war who serve under him, the whole army and navy, are unproductive laborers. Of the produce of land, one part replaces the capital of the farmer; the other pays his profit and the rent of the landlord; and thus constitutes a revenue both to the owner of this capital, as the profits of his stock; and to some other persons, as the rent of his land. Thus, at present, in the opulent countries of Europe, a very large, frequently the largest portion of the produce of the land, is destined for replacing the capital of the rich and independent farmer; the other for paying his profits, and the rent of the landlord. At present time, great capitals are employed in trade and manufactures, with the interest rate of no less than ten percent, although the average rate of interest is no-where high than six percent in the improved part of Europe. The proportion between capital and revenue seems everywhere to regulate the proportion between industry and idleness. Wherever capital predominates, industry prevails; wherever revenue, idleness. Every increase or diminution of capital, therefore, naturally tends to increase or diminish the real quantity of industry, the number of productive hands, and consequently, the exchangeable value of the annual produce of the land and labor of the country, the real wealth and revenue of all its inhabitants. Capitals are increased by parsimony, and diminished by prodigality and misconduct. The annual produce of the land and labor of any nation can be increased in its value by no other means, but by increasing either the number of its productive laborers, or the productive powers of those laborers who had before been employed. Kings and ministers should watch over the economy of private people, and restrain their expense, either by sumptuary laws, or by prohibiting the luxurious imports. 103 Chapter IV. Stock Lent at Interest: The stock which is lent at interest is always considered as a capital by the lender. The borrower may use it either as a capital, or as a stock reserved for immediate consumption. As the quantity of stock to be lent at interest increases, the interest, or the price which must be paid for the use of the stock, necessarily diminishes, not only from the general causes which make the market price of things commonly diminish as their quantity increases, but from other causes which are peculiar to this peculiar to this particular case. As capitals increase in any country, the profits which can be made by employing them necessarily diminish. There arises in consequence a competition between different capitals, the owner of one endeavoring to get possession of that employment which is occupied by another. The increase of the quantity of gold and silver, in consequence of the discovery of the Spanish West Indies, was the real cause of the lowering of the rate of interest through the greater part of Europe. Any increase in the quantity of silver, while that of the commodities circulated by means of it remained the same, could have no other effect than to diminish the value of that metal. Any increase in the quantity of commodities annually circulated within the country, while that of the money which circulated them remained the same, would, on the contrary, produce many other important effect, besides that of raising the value of money. The legal rate of interest ought not to be much above the lowest market rate: no law can reduce the common rate of interest below the lowest ordinary market rate at the time when that law is made. The ordinary market price of land, it is to be observed, depends everywhere upon the ordinary market rate of interest. The person who has a capital from which he wishes to derive a revenue, without taking the trouble to employ it himself, deliberates whether he should buy land with it, or lend it out at interest. As interest rate sunk to below six percent, the price of land rose to over twenty years purchase. The market rate of interest is higher in France than in England; and the common price of land is lower in England. 104 Book IV. The French Revolution and the Industrial Revolution,

48 Chapters V. The Different Employment of Capitals: A capital may be employed in four different ways: In the first way are employed the capitals of all those who undertake the improvement or cultivation of lands, mines, or fisheries; in the second, those of all master manufacturers; in the third, those of all wholesale merchants; and in the fourth, those of all retailers. The persons whose capitals are employed in any of those four ways are themselves productive laborers. The profits of the farmer, of the manufacturer, of the merchant, and retailer, are all drawn from the price of the goods which the two first produce, and the two last buy and sell. Equal capitals, however, employed in each of these four different quantities of productive labor, and augment too in very different proportions the value of the annual produce of the land and labor of the society to which they belong. Nor equal capital puts into motion a greater quantity of productive labor than that of the farmer. The capital of the manufacturer must no doubt reside where the manufacture is carried on; but where this shall be is not always necessarily determined. Whether the merchant whose capital exports the surplus produce of any society be a native or a foreigner, is of very little importance. When the capital of any country is not sufficient for all those three purposes, in proportion as a greater share of it is employed in agriculture, the greater will be the quantity of productive labor which it puts into motion within the country; as will likewise be the value which its employment adds to the annual produce of the land and labor of the society. After agriculture, the capital employed in manufactures puts into motion the greatest quantity of productive labor, and adds the greatest value to the annual produce. That which is employed in the trade of exportation, has the least effect of any of the three. The country, which has not capital sufficient for all those three purpose, has not arrived at that degree of opulence for which it seems naturally destined. The capital employed in the home-trade will give encouragement and supports to a greater quantity of productive labor in that country, and increase the value of its annual produce more than an equal capital employed in the foreign trade of consumption. 105 Each of those different branches of trade, however, is not only advantageous, but necessary and unavoidable, when the course of things, without any constraint or violence, naturally introduces it. When the produce of any particular branch of industry exceeds what the demand of the country requires, the surplus must be sent abroad, and exchanged for something for which there is a demand at home. Without such exportation, a part of the productive labor of the country must cease, and the value of its annual produce diminish. When the capital stock of any country is increased to such a degree, that it cannot be all employed in supplying the consumption, and supporting the productive labor of that particular country, the surplus part of it naturally disgorges itself into the carrying trade, and is employed in performing the same offices to other countries. The carrying trade is the natural effect and symptom of great national wealth; but it does not seem to be the natural cause of it. Those statesmen seem to have mistaken the effect and symptom for the cause. The extent of the home-trade and of the capital which can be employed in it, is necessarily limited by the value of the surplus produce of all those distant places within the country which have occasion to exchange their respective productions with one another. The consideration of his own private profit, is the sole motive which determines the owner of any capital to employ it either in agriculture, in manufactures, or in some particular branch of the wholesale or retail trade. The different quantities of productive labor which it may put into notion, and the different values which it may add to the annual produce of the land and labor of the society, according as it is employed in one or other of those different ways, never enter into his thought. In countries, therefore, where agriculture is the most profitable of all employments, and farming and improving the most direct roads to a splendid fortune, the capitals of individuals will naturally be employed in the manner most advantageous to the whole society. The profit of agriculture, however, seem to have no superiority over those of other employments in any part of Europe Book IV. The French Revolution and the Industrial Revolution,

49 BOOK III. The Different Progress of Opulence in Different Nations: Chapter I. The Natural Progress of Opulence: The great commerce of every civilized society, is that carried on between the inhabitants of the town and those of the country. It consists in the exchange of rude for manufactured produce, either immediately, or by the intervention of money, or of some sort of paper which represents money. The country supplies the town with the means of subsistence, and the materials of manufacture. The town repays this supply by sending back a part of the manufactured produce to the inhabitants of the country. As subsistence is, in the nature of things, prior to conveniency and luxury, so the industry which procures the former, must necessarily be prior to that which ministers to the latter. The cultivation and improvement of the country, therefore, which affords subsistence, must, necessarily, be prior to the increase of the town, which furnishes only the means of conveniency and luxury. It is the surplus produce of the country only, or what is over and above the maintenance of the cultivators, that constitutes the subsistence of the town, which can therefore increase only with the increase of this surplus produce. Upon equal, or nearly equal profits, most men will choose to employ their capitals rather in the improvement and cultivation of land, than either in manufactures or in foreign trade. In seeking for employment to a capital, manufacture are, upon equal or nearly equal profits, naturally preferred to foreign commerce, for the same reason that agriculture is naturally preferred to manufactures. According to the natural course of things, therefore, the greater part of the capital of every growing society is, first, directed to agriculture, afterwards to manufactures, and last of all to foreign commerce. 107 BOOK IV. Systems of Political Economy: Political economy, considered as a branch of the science of a statesman or legislator, proposes two distinct objects: first, to provide a plentiful revenue or subsistence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for the public services. It proposes to enrich both the people and the sovereign. The different progress of opulence in different ages and nations, has given occasion to two different systems of political economy, with regard to enriching the people. The one may be called the system of commerce, the other that of agriculture, to be discussed in the Book IV. 108 Chapter I. The Principle of the Commercial or Mercantile System: Spain and Portugal have either prohibited their exportation under the severest penalties, or subjected it to a considerable duty. When European countries became commercial, they remonstrated against this prohibition as hurtful to trade. First, the exportation of gold and silver in order to purchase goods did not always diminish the quantity of those metals in the kingdom. On the contrary, it might frequently increase that quantity; because, if the consumption of foreign goods was not thereby increased in the country, those goods might be re-exported to foreign countries, and, being there sold for a large profit, might bring back much more treasure than was originally sent out to purchase them. Secondly, this prohibition could not hinder the exportation of gold and silver, which, on account of the smallness of their bulk in proportion to their value, could easily be smuggled around. This exportation could only be prevented by a proper attention to the balance of trade. When the country exported to a greater value than it imported, a balance became due to it from foreign nations, which was necessarily paid to it in gold and silver, and thereby increased the quantity of those metals in the kingdom. But when it imported to a great value than it exported, a contrary balance became due to foreign nations, which was necessarily paid to them in the same manner, and thereby diminish that quantity. In this case, to prohibit the exportation of those metals could not prevent it, but only by making it more dangerous, render it more expensive. The high price of exchange necessarily increased the unfavorable balance of trade, or occasioned the exportation of a greater quantity of gold and silver. It would tend, therefore, not to increase, but to diminish the unfavorable balance of trade and consequently, the exportation of gold and silver. 109 Book IV. The French Revolution and the Industrial Revolution,

50 The quantity of every commodity which human industry can either purchase or produce, naturally regulates itself in every country according to the effectual demand, or according to the demand of those who are willing to pay the whole rent, labor and profits which must paid in order to prepare and bring it to market. But no commodities regulate themselves more easily or more exactly according to this effectual demand than gold and silver, because, on account of the small bulk and great value of those metals, no commodities can be more easily transported from one place to another, from the places where they are cheap, to those where they are dear, from the places where they exceed, to those where they fall short of this effectual demand. When the quantity of gold and silver imported into any country exceeds the effectual demand, no vigilance of government can prevent their exportation. It is not always necessary to accumulate gold and silver, in order to enable a country to carry on foreign wars, and to maintain fleets and armies in distant countries. Fleets and armies are maintained, not with gold and silver, but with consumable goods from the annual produce of its nation. The two principles being established, that wealth consisted in gold and silver, and that those metals could be brought into a country which had no mines only by the balance of trade, or by exporting to a greater value than it imported; it became the great object of political economy to diminish as much as possible the importation of foreign goods for home consumption, and to increase as much as possible the exportation of the produce of domestic industry. There were two engines enriching the country: restraints upon importation and encouragements to exportation. Restraints were two kinds: first, the restraints for importation of such foreign goods for home consumption could be produced at home from whatever country they were imported; second, restraints upon the importation of goods from those particular countries with which the balance of trade was supposed to be disadvantageous. They consisted in high duties or absolute prohibitions. Encouragements had four measures: drawbacks, bounties, advantageous treaties of commerce, and the establishment of colonies. 110 Chapter II. Restraints upon the Importation: By restraining, either by high duties, or by absolute prohibitions, the importation of such goods from foreign countries as can be produced at home, the monopoly of the home market is more or less secured to the domestic industry employed in producing them. The monopoly of the home-market frequently gives great encouragement to that particular species of industry which enjoys it, and frequently turns towards that employment a greater share of both the labor and stock of the society than would otherwise have gone to it, cannot be doubted. First, every individual endeavors to employ his capital as near home as he can, and consequently as much as he can in the support of domestic industry; provided always that he can thereby obtain the ordinary, or not a great deal less than the ordinary profits of stock. Secondly, every individual who employs his capital in the support of domestic industry, necessarily endeavors so to direct that industry; that its produce may be of the greatest possible value. The natural advantages which one country has over another in producing particular commodities are sometimes so great that it is acknowledged by all the world to be in vain to struggle with them. Merchants and manufactures are the people who derive the greatest advantage from this monopoly of the home-market. The act of navigation forced the monopoly of the trade of Great Britain, which was necessary for the defense of the country: foreigners are hindered either by prohibitions or high duties from coming to sell and to buy. Were those high duties and prohibitions taken away all at once, cheaper foreign goods might be poured so fast into the home market: the disorder might be considerable. Nevertheless, all those manufactures, of which any part is commonly exports to other European countries without a bounty, could be very little affected by the freest importation of foreign goods. Moreover, though a great number of people should, by thus restoring the freedom of trade, be thrown all at once out of their ordinary employment and common method of subsistence, they would be deprived either of employment or subsistence Book IV. The French Revolution and the Industrial Revolution,

51 Chapter III. The Extraordinary Restraints upon the Importation of goods of almost all kinds, from those countries with which the balance is supposed to be disadvantageous: [Part I] The Unreasonableness of those Restraint even upon principles of the commercial system: To lay extraordinary restraints upon the importation of goods of almost all kinds, from those particular countries with which the balance of trade is supposed to be disadvantageous, is the second expedient by which the commercial system proposes to increase the quantity of gold and silver. First, though it were certain that in the case of a free trade between France and England, for example, the balance could be in favor of France, it would by no means follow that such a trade would be disadvantageous to England, or that the general balance of its whole trade would thereby be turned more against it. Secondly, a great part of them might be re-exported to other countries, where, being sold with profit, they might bring back a return equal in value, perhaps, to the prime cost of the whole French goods imported. Thirdly, and lastly, there is no certain criterion by which we can determine on which side what is called the balance between any two countries lies, or which of them exports to the greatest value. But first, we cannot always judge of the value of current money of different countries by the standard of their respective mints. The value of the current coin of every country, compared with that of any other country, is in proportion not to the quantity of pure silver which it ought to contain, but to that which it actually does contain. Secondly, in some countries, the expense of coinage is defrayed by the government; on other, it is defrayed by the private people who carry their bullion to the mint, and the government even derives some revenue from the coinage. Thirdly, in some more places, as at Amsterdam, Hamburg, Venice, etc. foreign bills of exchange are paid in what they call bank money; while in others, as at London, Lisbon, Antwerp, Leghorn, etc., they are paid in the common currency of the country. Bank money is always of more value than the same nominal sum of common currency. 112 [Part II] The Unreasonableness of those extraordinary restraints upon other principles: A nation that would enrich itself by foreign trade, is certainly most likely to do so when its neighbors are all rich, industrious, and commercial nations. The modern maxims of foreign commerce, by aiming at the impoverishment of all our neighbors, so far as they are capable of producing their intended effect, tend to render that very commerce insignificant and contemptible. It is in consequence of these maxims that the commerce between France and England has in both countries been subjected to so many discouragements and restraints. If those two countries, however, were to consider their real interest, without either mercantile jealousy or national animosity, the commerce of France might be more advantageous to Great Britain than that of any other country, and for the same reason that of Great Britain to France. There is another balance the balance of the annual produce and consumption. If the exchangeable value of the annual produce exceeds that of the annual consumption, the capital of the society must annually increase in proportion to this excess. The society in this case lives within its revenue, and what is annually saved out of its revenue, is naturally added to its capital, and employed so as to increase still further the annual produce. If the exchangeable value of the annual produce, on the contrary, fall short of the annual consumption, the capital of the society must annually decay in proportion to its deficiency. The expense of the society in this case exceeds its revenue, and necessarily encroaches upon its capital. This balance of produce and consumption is entirely different from the balance of trade. The balance of produce and consumption may be constantly in favor of a nation, though what is called the balance of trade be generally against it. A nation may import to a greater value than it exports for half a century, perhaps, together; the gold and silver which comes into it during all this time may be all immediately sent out of it; its circulating coin may gradually decay, different sort of paper money being substituted in its place, and even the debts too which it contracts in the principal nations with whom it deals, may be gradually increasing. 113 Book IV. The French Revolution and the Industrial Revolution,

52 Chapter IV. Drawbacks: Merchants and manufactures are not contented with the monopoly of the home market, but desire likewise the most extensive foreign sale for their goods. Their country has no jurisdiction in foreign nations, and therefore can seldom procure them any monopoly here. They are generally obliged, therefore, to content themselves with petitioning for certain encouragements to exportation. Of these encouragements what are called Drawbacks seem to be the most reasonable. To allow the merchant to draw back upon exportation, either the whole or a part of whatever excise or inland duty is imposed upon domestic industry, can never occasion the exportation of a greater quantity of goods than that would have been exported had no duty been imposed. Drawbacks were originally granted for the encouragement of the carrying trade, which, as the freight of the ships is frequently paid by foreigners in money, was supposed to be peculiarly lifted for bringing gold and silver into the country. However, a drawback upon the exportation of European goods to our American colonies, for example, will not always occasion a greater exportation than what would have taken place without it. 114 Chapter V. Bounties: Bounties upon exportation are, in Great Britain, frequently petitioned for, and sometimes granted to the produce of particular branches of domestic industry. It often takes form of a premium paid for the increased production or export of certain goods. By means of them our merchants and manufacturers will be enabled to sell their goods as cheap as or cheaper than their rivals on the foreign market. A greater quantity will thus be exported, and the balance of trade consequently turned more in favor of our own country. The mercantile system proposes to enrich the whole country, and to put money into all our pocket by means of the balance of trade. By occasioning an extraordinary exportation, the bounty necessarily keeps up the price of corn in home market. The real effect of the bounty is not so much to raise the real value of corn, for the money price of corn regulates that of all other home-made commodities. Premiums given by the public to artists and manufacturers are not liable to the same objection as bounties. 115 Chapter VI. Advantageous Treaties of Commerce: When a nation binds itself by treaty either to permit the entry of certain goods from one foreign country which it prohibits from all others, or to exempt the goods of one country from duties to which is subjects those of all others, or to exempt the goods of one country from duties to which it subjects those of all others, the country, or at least the merchants and manufacturers of the country, whose commerce is so favored, must necessarily derive great advantage from the treaty. Those merchants and manufacturers enjoy a sort of monopoly in the country which is so indulgent to them. That country becomes a market both more extensive and more advantageous for their goods; more extensive, because the goods of other nations being either excluded or subjected to heaviest duties, it takes off a greater quantity of theirs: more advantageous, because the merchants of the favored country, enjoying a sort of monopoly there, will often sell their goods for a better price than if exposed to the free competition of all other nations. But a monopoly granted to foreign nations could not last longer. 116 Chapter VII. Colonies: The motive of the Spanish conquest was a project of gold and silver mines, which was more successful by accident than expected. However, in the countries first discovered by the Spaniards, no gold or silver mines are at present known which are supposed to be worth the working. The first adventurers of all the other nations of Europe, who attempted to make settlement in America, were animated by the like chimerical views; but they were not equally successful. The first English settlers in North America, however, offered a fifth of all the gold and silver which should be found there to the king, as a motive for granting them their patents. In the parents to Sir Walter Raleigh, to the London and Plymouth companies, to the council of Plymouth, etc. this fifth was accordingly reserved to the crown. To the expectation of finding gold and silver mines, those first settlers too joined that of discovering a north-west passage to the East Indies. They have hitherto been disappointed in both Book IV. The French Revolution and the Industrial Revolution,

53 Chapter VIII. Conclusion of the Mercantile System: Though the encouragement of exportation, and the discouragement of importation, are the two great engines by which the mercantile system proposes to enrich every country, yet with regard to some particular commodities, it seems to follow an opposite plan: do discourage exportation and to encourage importation. Its ultimate object is always the same, to enrich the country by an advantageous balance of trade. It discourages the exportation of the materials of manufacture, and of the instruments of trade, in order to give our won workmen an advantage, and to enable them to undersell those of other nations in foreign markets; and by restraining the exportation of few commodities, of great price, it proposes to occasion of a few commodities, of no great price, it proposes to occasion a much greater and more valuable exportation of others. It encourages the importation of the materials of manufacture, in order that our own people may be enabled to work them up more cheaply, and thereby prevent a greater and more valuable importation of the manufactured commodities. The importation of the materials of manufacture has sometimes been encouraged by an exemption from the duties, and sometimes by bounties. In the system of laws which has been established for the management of our American and West Indian colonies, the interest of the home-consumer has been sacrificed to that of the producer with a more extravagant profusion than in all our other commercial regulation. In the mercantile regulations, the interest of our manufacturers has been most peculiarly attended to; and the interest, as that of some other sets of producer, has been sacrificed to it. 118 Chapter IX. The Agricultural System: The agricultural systems of political economy will not request so long an explanation as that which I have thought it necessary to bestow upon the mercantile or commercial system. The continual increase of the surplus produce of their land, would, in due time, create a greater capital than what could be employed with the ordinary rate of profit in the improvement and cultivation of land; and the surplus part of it would naturally turn itself to the employment of artificers and manufacturers at home. The surplus of this capital would naturally turn itself to foreign trade, and be employed in exporting, to foreign countries, such parts of the rude and manufactured produce of its own country, as exceeded the demand of the home market. When a landed nation, on the contrary, oppresses either by high duties or by prohibitions the trade of foreign nations, it necessarily hurts its own interest in two different ways. First, by raising the price of all foreign goods and of all sorts of manufactures, it necessarily sinks the real value of the surplus produce of its own land, with which, or, what comes to the same thing, with the price of which, it purchases those foreign goods and manufactures. Secondly, by giving a sort of monopoly of the home market to its own merchants, artificers and manufacturers, it raises the rate of mercantile and manufacturing profit in proportion to that of agricultural profit, and consequently either draws from agriculture a part of the capital which had before been employed in it, or hinders from going to it a part of what would otherwise have gone to it. This policy discourages agriculture in two different ways: first, by sinking the real value of its produce, and thereby lowering the rate of its profit; and secondly, by raising the rate of profit in all other employments. Agriculture is rendered less advantageous, and trade and manufactures more advantageous than they otherwise would be; and every man is tempted by his own interest to turn, as much as he can, both this capital and his industry from the former to the latter employments. All systems either of preference or of restraint, being thus completely away, the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, it left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men. According to the system of natural liberty, the sovereign has only three duties: protecting the society from the violence and foreign invasion; protecting of every member of the society from the injustice or oppression; and erecting and maintaining certain public institutions. 119 Book IV. The French Revolution and the Industrial Revolution,

54 BOOK V. The Revenue of the Sovereign and Commonwealth: Chapter I. The Expenses of the Sovereign or Commonwealth: [Part I] The Expense of Defense: The first duty of the sovereign, that of protecting the society from the violence and invasion of other independent societies, can be performed only by means of a military force. But the expense both of preparing this military force in time of peace, and of employing it in time of war, is very different in the different states of society, in the different periods of improvement. This first duty grows gradually more and more expensive, as the society advances in civilization. The great change introduced into the art of war by the invention of fire-arms, has enhanced still further both the expense of exercising and disciplining any particular number of soldiers in time of peace, and of war. [Part II] The second duty of the sovereign, that of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it, or the duty of establishing an exact administration of justice requires too very different degrees of expense in the different periods of the society. Justice, however, never was in reality administered gratis in any country. Lawyers and attorneys, at least, must always be paid by the parties. A stamp-duty upon the law proceedings of each particular court, to be levied by that court, and applied towards the maintenance of the judges and other officers belong to it. It has been the custom in modern Europe to regulate, upon most occasions, the payment of the attorneys and clerks of court, according to the number of pages which they had occasion to write; the court, however, requiring that each pages should contain so many lines, and each line so many words. [Part III] The Public Works and Institutions for facilitating the commerce of the society: The erection and maintenance of the public works which facilitate the commerce of any country, such as good roads, bridges, navigable canals, harbors, etc. must require very different degree of expense in the different periods of society, is evident; which facilitates commerce in general. The protection of trade in general has always been considered as essential to the defense of the commonwealth; which requires the duty of the executive power. 120 Chapter II. The Sources of the General or Public Revenue of the Society: The revenue which the great body of the people derives from land is in proportion, not to the rent, but to the produce of the land. The whole annual produce of the land of every country is either annually consumed by the great body of the people, or exchanged for something else that is consumed by them. Public stock and public lands, the two sources of revenue which may peculiarly belong to the sovereign or commonwealth, being both improper and insufficient funds for defraying the necessary expense of any great and civilized state; it remains that this expense must, the greater part of it, be defrayed by taxes of one kind or another; the people contributing a part of their own private revenue in order to make up a public revenue to the sovereign or commonwealth. [Article I] Taxes upon rent of land. [Article II] Taxes upon profit or upon the revenue arising from stock. [Article III] Taxes upon the wages of labor. [Article IV] Taxes which, it is intended, should fall indifferently upon every different species of revenue: capital taxes, taxes upon consumable commodities. 121 Chapter III. Public Debts: When the resource is exhausted, and it becomes necessary, in order to raise money, to assign or mortgage some particular branch of the public revenue for the payment of the debt, government has upon different occasions done this in two different ways. Sometimes it has made this assignment or mortgage for a short period of time only, a year, or a few years, for example; and sometimes for perpetuity. The ordinary expense of the greater part of modern governments in time of peace being equal or nearly equal to their ordinary revenue; when war comes, they are both unwilling and unable to increase their revenue in proportion to the increase of their expense. The new taxes were imposed for the sole purpose of paying the interest of the money borrowed upon them. In the payment of the interest of the public debt, the money does not go out of the country. Land and capital stock are the two original sources of all revenue both private and public - the proprietors of land, and the owners of capital stock Book IV. The French Revolution and the Industrial Revolution,

55 Jean-Baptiste Say ( ): born in Lyon to a Protestant family, Say was intended to follow a commercial career, and in 1785 was sent, with his brother Horace, to complete his education in England: here he attended a private school in Croydon, and was afterwards employed by a merchant in London. When, on the death of the latter, he returned to France in 1787, he was employed in the office of a life assurance company. 123 In 1792 he took part as a volunteer in the campaign of Champagne; in 1793 became secretary to Claviere, then finance minister. After the marriage in 1793, Say edited a periodical from in which he expounded the doctrines of Adam Smith. In 1803 Say published the first edition of A Treatise on Political Economy or The Production, Distribution and Consumption of Wealth. After the fall of Napoleon, Say was officially sent on a mission to England to find out how far France had fallen behind in the Industrial Revolution sweeping across England. In 1819 he became the first French academic teacher of economics when he began teaching a course on industrial economics at the Conservatoire des Arts et Metiers. In 1930, he was appointed the first professor of political economy at the College de France in Paris. Say sent a copy of his book to U.S. President Thomas Jefferson, who cordially responded to Say in 1804 with some thought on future possibilities of trade and commerce between American and Europe. Ten years later in 1814, Say sent Jefferson a copy of the second edition of his Treatise. An English translation was published in 1821; his book was later reprinted in many editions, and was used at many institutions, at Harvard in 1850 and at Dartmouth in My summary of the Say s Treatise begin with is his Introduction as below. 124 INTRODUCTION: Experiencing the French Revolution and the Industrial Revolution in England, Say could capture a greater part of the scientific and technological advances with very recent origin of knowledge of the time, compared with Smith. (i) Since the time of Adam Smith, it appears to me, these two very distinct inquires have been uniformly separated; the term political economy being now confined to the science which treats of wealth, and that of politics, to designate the relations existing between a government and its people, and relations of different states to each other. In political economy, agriculture, commerce, and manufactures are considered only in relation to the increase or diminution of wealth, and not in reference to their processes of execution. Merchants must also understand the process of their art in the markets (seems to mean dynamics of market activities). (ii) Say favored the inductive method in economic studies because of dangers in the incorrect and fallacious use of statistics and mathematics. It has been applied to the conduct of our researches in this. Facts that take place may be considered in two points of view: general facts are the results of the nature of things in all analogous cases; and particular facts as truly result from the nature of things, but they are the result of several operations modified by each other in a particular case. Statistics exhibit the amount of production and of consumption of a particular country, at a designated period; it does not indicates the origin and consequences of the facts it has collected. General facts undoubtedly are founded upon the observation of particular facts, but the former is more appropriate to the science of political economy. (iii) In consequence of the authority of the feudal lords and barons declining, the intercourse between the different provinces and states could no longer be interrupted; roads became improved, traveling more secure, and laws less arbitrary; the enfranchised towns, becoming immediately dependent upon the crown, found the sovereign interested in this advancement; and this enfranchisement, which the natural course of things and the progress of civilization had extended to the country, secured to every class of producers the fruits of their industry. In every part of Europe personal freedom became more generally respected. The prosperity of the same countries would have been much greater, had they been governed by a more liberal and enlightened policy. A free intercourse between nations is reciprocally advantageous, and beneficial to individuals transacting business with foreigners. Thus Say propagates Smith s thought: free trade with laissez faire is reciprocally advantageous. 125 Book IV. The French Revolution and the Industrial Revolution,

56 Say identified and attempted to correct some errors in the Wealth of Nations. (i) The labor theory of value: Smith viewed human labor as the sole source of value, but Say viewed that the industry of man combines with other agents in nature and capital to produce value. Does a tax, or any other impost, by enhancing the price of commodities, increase the amount of wealth? The income of the producer arising from the cost of production, why is not this income impaired by a diminution in the cost of production? (ii) A definition of wealth: By the exclusive restriction of the term wealth to values fixed and realized in material substance, Smith has narrowed the boundary of this science, arguing that human talents and acquired skills should also be deemed a part of the wealth of a nation. (iii) A limited description of the nature of industrial and commercial production. The role of the entrepreneur was not sufficiently emphasized in the Wealth of Nations. Smith s theory of distribution leaves much to be desired. (iv) Although the phenomena of the consumption of wealth are but the counterpart of its production, and although Smith s doctrine leads to its correct examination, he did not himself develop it; which precluded him from establishing numerous important truths. Say wrote on consumption in Book III of his Treatise. Say concludes his introduction: Thus, habitually and naturally ascending to the source of all truth, we shall not suffer ourselves to be imposed upon by empty sounds, or submit to the guidance of erroneous impression. Corruption, deprived of the weapons of empiricism, will lose her principal strength, and no longer be able to obtain triumphs, calamitous to honest men, and disastrous to nations. In the year 1826, a professorship of political economy was formed at Oxford. 126 BOOK I. Production of Wealth: Chapter I. Definition of Production: Production of wealth is a creation of utility: the buyer of a products buys it only for the sake of its utility, of the use he can make. Chapter II. The Different Kinds of Industry, and the mode in which they concur in production: The industry consists of three branches: agriculture, manufacture, and commerce. The total value of products serves to pay the profits of those occupied in production. Chapter III. The Nature of Capital, and the mode in which it concurs in the business of production: The pre-existing requisites are the tools and implements of the several arts, the products necessary for the subsistence of the industrious agent, and the raw materials. The value of all these items constitutes what is dominated productive capital, which is classed the value of all erections and improvements upon real or landed property; money employed to facilitate the interchange of products, without which production could never make any progress. Chapter IV. Natural Agents that assist in the production of wealth, and specially of land: Smith has drawn the false conclusion, that all values produced represent pre-exerted human labor or industry, either recent or remote; or, in other words, that wealth is nothing more than labor accumulated; from which position he infers a second consequence equally erroneous, vis. That labor is the sole measure of wealth, or of value produced. But Say writes that values produced are referable to the agency and concurrence of industry, of capital, and of natural agents, whereof the chief, though by no means the only one, is land capable of cultivation; and that no other but these three sources can produce value, or add to human wealth. Chapter V. The Mode in which Industry, Capital, and Natural Agents unite in Production: The three sources industry, capital, and natural agents create products: the prices pay for the loan of industry is called wages; that of capital is called interest, and that of land is called rent. Chapter VI. Operations alike Common to all branches of industries: The knowledge of the man of science is necessary for a country well to stock with intelligent merchants, manufacturers, and agricultualists to attain more powerful means of attaining prosperity. Chapter VII. The Labor of Mankind, of Nature, and of Machinery Respectively: The productive services of labor, of capital, and of machinery are important for effective production. The multiplication of a product commonly reduces its price, that reduction extends its consumption; and so its production, though become more rapid, nevertheless gives employment to more hands than before Book IV. The French Revolution and the Industrial Revolution,

57 Chapter VIII. The Advantageous and Disadvantages resulting from Division of Labor: Since the scientific knowledge is indispensable to develop industry, Say suggests a government to defray the charges of scientific experiment to cover risks from invention and innovation. The division of labor cheapens products since specialization increases productivity, which contributes to the wealth of a nation. Chapter IX. The Different Methods of Employing Commercial Industry, and the mode in which they concur in production: Thin internal commerce of a country is likewise the most advantageous: both the remittances and returns of this commerce are necessarily home products; abolition of tolls and duties on transition promotes internal circulation; which is favorable to national wealth. Trade speculation consists in the purchase of goods at one time, to be re-sold in the same place and condition at another time, when they are expected to be dearer. The carrying foreign grade is beneficial not only to the merchant that practices it, but also to the two nations between whom it is practiced. Moreover, maritime industry is influential upon national security. Chapter X. The Transformations undergone by Capital in the progress of productions: During the progress of production, Say shows how productive capital keeping in a continual state of employment in three branches of industry: agriculture, manufacture, and commerce. Chapter XI. The Formation and Multiplication of Capital: The increase of capital is naturally slow of progress for it can never take place without actual production of value, and the creation of value is the work of time and labor, besides other ingredients. Every saving or increase of capital lays the groundwork of a perpetual annual profit, not only to the saver himself, but likewise to all those whose industry is set in motion by this item of new capital. It is fortunate, that self-interest is always on the watch to preserve the capital of individuals; and that capital can at no time be withdrawn from productive employment, without a proportionate loss of revenue. 128 Chapter XII. Unproductive Capital: Hitherto we have been considering that kind of value only, which is capable, after its creation. But some there are, which must have reality, because they are in high estimation, and purchased by the exchange of costly and durable products, which nevertheless have themselves no durability, but perish the moment of their production, the can be called immaterial products. Chapter XIII. Immaterial Products, or values consumes at the moment of production: A physician goes to visit a sick person, observes the symptoms of disease, prescribes a remedy, and takes his leave without depositing any product, that the invalid or his family can transfer to a third person, or even keep for the consumption of a future day. The Industry of a musician or an actor yields a product of the same kind: it gives one an amusement, a pleasure on cannot possibly retain or preserve for future consumption, or as the object of barter for other enjoyments. Thus the nature of immaterial products makes it impossible ever to accumulate them, so as to render them a part of the national capital. Consequently, nothing is gained on the score of public prosperity, by ingeniously creating an unnatural demand for the labor of any of these professions; the labor diverted into that channel of production cannot be increased, without increasing the consumption also, although immaterial products are the fruit of labor. A public edifice, a bridge, a highway, are savings or accumulations of revenue, devoted to the formation of a capital, whose returns are an immaterial product consumed by the public at large. Chapter XIV. The Right of Property: Political economy recognizes the right of property solely as the most powerful of all encouragements to the multiplication of wealth, and is satisfied with its actual stability, without inquiring about its origin or its safeguards. Nor can property be said to exist, where it is not matter of reality as well as of right. The sources of production, namely, land, capital, and industry can attain their utmost degree of fecundity. Public safety sometimes requires the sacrifice of private property; but that sacrifice is a violation, notwithstanding an indemnity given in such cases. For the right of property implies the free disposition of one s won; and its sacrifice, however fully indemnified, is a forced disposition. 129 Book IV. The French Revolution and the Industrial Revolution,

58 Chapter XV. The Demand or Market for Products: Products would always be abundant, if there were but a ready demand, or market for them. There is always money enough to conduct the circulation and mutual interchange of other values, when those values really exist. (i) In every community, the more numerous are the producers, and the more various their productions, the more prompt, numerous, and extensive are the markets for those productions; and, by a natural consequence, the more profitable are they to the producers; for price rises with the demand. (ii) Each individual is interested in the general prosperity of all, and the success of one branch of industry promotes that of all the others. (iii) It is no injury to the internal or national industry and production to buy and import commodities from abroad; for nothing can be bought from strangers, except with native products, which find a vent in this external traffic. (iv) The same principle leads to the conclusion, that the encouragement of mere consumption is no benefit to commerce; for the difficulty lies in supplying the means, not in stimulating the desire of consumption; and we have seen that production alone, furnishes those means. Say s Law of Markets views that supply and demand balance in the long run in dealing with the adjustment mechanism toward an equilibrium position in the market. It is the aim of good government to stimulate production, of bad government to encourage consumption. For the same reason that the creation of a new product is the opening of a new market for other products, the consumption or destruction of a product is the stoppage of a vent for them. Indeed, if the nation be in a thriving condition, the gross national re-production exceeds the gross consumption. 130 Chapter XVI. The Benefits resulting from the Quick Circulation of Money and Commodities: The best stimulus of useful circulation is, the natural wish of all classes, especially the producers themselves, to incur the least possible amount of interest upon the capital embarked in their respective undertakings. Circulation is much more apt to be interrupted by the obstacles thrown in its way, than by the want of proper encouragement: including wars, embargoes, oppressive duties, the dangers and difficulties of transportation. 131 Chapter XVII. The Effect of Government Regulations influencing Production: [Section I] Effect of Regulations prescribing the Nature of Products: The natural wants of society, and its circumstances for the time being, occasion a more or less lively demand for particular kinds of products. Consequently, in these branches of production, productive services are somewhat better paid than in the rest; that is to say, the profit upon land, capital and labor, devoted to those branches of production, are somewhat larger. This additional profit attracts producers, and thus the nature of the products is always regulated by the wants of society. The most enlightened statesman is often obliged to abandon a scheme of evident public utility, by the unavoidable defects and abuses in the execution. Among these, one of the most frequent and prominent is, the risk of paying a premium, or granting a favor to the pretensions, not of merit, but of importunity. [Section II] The Effect of Regulations fixing the Manner of Production: The interference of the public authority, with regard to the details of agricultural production, has generally been of a beneficial kind. All governments that have pretended to the least regard for the public welfare have consequently confined themselves to the granting of premiums and encouragements, and to the diffusion of knowledge which has often contributed largely to the progress of this art. Much of the interference has been directed towards limiting the number of producers, either by confining them to one trade exclusively, or by exacting specific terms, on which they shall carry on their business. This system gave rise to the establishment of chartered companies and incorporated trades. [Section III] Privileged Trading Companies: A government sometimes grants to individual merchants, and much oftener to trading companies, the exclusive privilege of buying and selling specific articles, or trafficking with a particular country. [Section IV] Regulations affecting the Corn Trade: The number of mankind increase, in proportion to the supply of subsistence. The abundance and cheapness of provisions are favorable to the advance of population Book IV. The French Revolution and the Industrial Revolution,

59 Chapter XVIII. The Effect upon National Wealth, resulting from the productive efforts of public authority: There are some concerns which the government must of necessity keep in its own hands. The building of ships of war cannot safely be left to individuals; nor, perhaps, the manufacture of gunpowder. Although the public can scarcely be itself a successful producer; it can at any rate give a powerful stimulus to individual productive energy, by well-planned, wellconducted, and well-supported public works, particularly roads, canals, and harbors. Facility of communication assists production, exactly in the same way as the machinery that multiplies manufactured product, and abridges the labor of production. It is a means of furnishing the same product at less expense, which has exactly the same effect, as raising a greater product with the same expense. Academies, libraries, public schools, and museums, founded by enlightened governments, contribute to the creation of wealth. There is none so powerful as the perfect security of person and property, especially from the aggression of arbitrary power. Monetary accession of wealth must be a necessary condition for any state. Chapter XIX. Colonies and their Products: It is common for nations to colonize, when their population becomes crowded in its ancient territorial limits; and when particular classes of society are exposed to the persecution of the rest. These appear to have been the only motives for colonization among the ancients; the moderns have been actuated by other views. The vast improvements in navigation have opened new channels to their enterprise, and discovered countries before unknown; they have found their way to another hemisphere, and to the most inhospitable climates, not with the intention of these fixing themselves and their posterity, but to obtain valuable articles of commerce, and return to their native countries, enrich with the fruits of a forced, but yet very extensive production. It is agreed that the labor of the salve is dearer and less productive than that of the freeman. 133 Chapter XX. Temporary and Permanent Emigration, considered in reference to national wealth: The emigration of industry, capital, and local attachment, is no less a dead and total loss to the country thus abandoned, than it is a clear gain to the country affording an asylum. The best mode of retaining and attracting mankind is, to treat them with justice and benevolence; to protect everyone in the enjoyment of the rights he regards with the highest reverence; to allow the free disposition of persons and property, the liberty of continuing or changing his residence, of speaking, reading, and writing in perfect security. Chapter XXI. The Nature and Uses of Money: (i) General Remarks; (ii) The material of money; (iii) The accession of value a commodity receives; (iv) The utility of coinage; (v) Alteration of the standard of money; (vi) The reason why money is neither a sign nor a measure; (vii) A peculiarity that should be attended to; (viii) The absence of any fixed ratio of value between one metal and another; (ix) Money as it ought to be; (x) A copper and base metal coinage; (xi) The preferable form of coined money; (xii) The party, on whom the loss of the coin by wear should properly fall. Chapter XII. Signs or Representatives of Money: (i) Bills of exchange and letters of credit: A bill of exchange, a promissory note or check, and a letter of credit, are written obligations to pay, or cause to be paid, a sum of money, either at a future time, or at a different place. (ii) Banks of deposit: The constant intercourse between a small state and its neighbors occasions a perpetual influx of foreign coin. For, although the small state may have a national coinage of its own, yet, the frequent necessity of taking the foreign instead of the national coin in payment, requires the fixation of the ratio of their relative value, in the current transactions of business. (iii) Banks of circulation or discount, and of bank-notes, or convertible paper: There is another kind of bank, consisting of associated capitalists, subscribing a capital in transferable shares, to be employed in various profitable ways, but chiefly in the discount of promissory notes and bills of exchange. (iv) Paper money: I have reserved exclusively for those obligations to which the ruling power may give a compulsory circulation in payment for all purchases, and discharge all debts and contracts, stipulating a delivery of money. 134 Book IV. The French Revolution and the Industrial Revolution,

60 BOOK II. The Distribution of Wealth: Chapter I. The Basis of Value, and of Supply and Demand: Whatever be the general or particular causes, that operate to determine the relative intensity of supply and demand, it is that intensity, which is the ground-work of price on every act of exchange; for price, it will be remembered, is merely the current value estimated in money. The demand for all objects of pleasure, or utility, would be unlimited, did not the difficulty of attainment, or price, limit and circumscribe the supply. On the other hand, the supply would be infinite, were it not restricted by the same circumstance, the price or difficulty of attainment; for there can be no doubt, that whatever is producible would then be produced in unlimited quantity, so long as it could find purchasers at any price at all. Demand and supply are the opposite extremes of the beams, whence depend the scales of dearness and cheapness; the price is the point of equilibrium, where the momentum of the one ceases, and that of the other begins. When the price of any object is legally fixed below the charges of its production, its production is discontinued, because nobody is willing to labor for a loss. Chapter II. The Source of Revenue: Products are raised by the productive means at the command of mankind, that is to say, by human industry, capital, and natural power and agents. The exclusive right to dispose of revenue is a consequence of the exclusive right, or property, in the means of production. The industrious faculties of man, his intelligence, muscular strength, and dexterity, are peculiar to himself and inherent in his nature. And capital, or accumulated produce, is the mere result of human frugality and forbearance to exercise the faculty of consuming. The revenue of a nation is eth more considerable, in proportion to the intensity of the value whereof it consists, i.e. of the value of its aggregate productive powers, and to its high relative degree to the value of the objects of external attainment. 135 Chapter III. Real and Relative Variation of Price: The price of an article is the quantity of money it may be worth; current price, the quantity it may be sure of obtaining at the particular place. The price obtained upon the sale of an article represent all other articles procurable with that price. There is the difference between a real and a relative variation of price: that the former is a change of value, arising from an alteration of the charges of production; the latter, a change, arising from an alteration of the ratio of value of one particular commodity to other commodities. Real variations are beneficial to buyers, without injury to sellers; and vice versa; but in relative ones, what is gained by the seller is lost by the purchaser and vice versa. Chapter IV. Nominal Variation of Price, and of the peculiar value of bullion and of coin: Since the discovery of the American mines, silver, having fallen to about a fourth of its former value, has lost three-fourths of its relative value to all other products, whose price has, meanwhile, remained stationary. But there have been vast alterations in the denomination given, at different periods during the interim, to the same quantity of pure metal, which should make us place very little reliance on the accuracy of our estimate of real and relative variation. Chapter V. The Manner in which Revenue is Distributed amongst Society: Each class receives its respective share of the total value produced; and this chare composes its revenue: the profit of land, of capital, and of labor. The total value of products is distributed amongst the members of the community. Chapter VI. What Branches of Production yield the most liberal recompense to productive agency: The aggregate value of a product refunds to its different concurring producers the amount of their advances, with the addition in most cases, of a profit, that constitutes their revenue. But the profits of productive agency are not of equal amount in all its branches; some yielding but a very scanty revenue for the land, capital, or industry, embarked in them; while others give an exorbitant return. Productive agents always endeavor to direct their agency to those employments, in which the profits are the greatest, and thus, by their competition, have as much tendency to lower price, as demand has to raise it; but the effects of competition cannot always so nicely proportion the supply to the demand, as in every case to ensure an equal remuneration Book IV. The French Revolution and the Industrial Revolution,

61 Chapter VII. The Revenue of Industry: (i) The profit of industry in general: Industry, capital, and land, all yield, ceteris paribus, the largest profits, when the general demand for products in most active, affluence most expanded, profits most widely diffused, and production most vigorous and prolific. To begin with the comparison of the relative profits of industry, to those of capital and land, we shall find these bear the highest ratio, where abundance of capital creates a demand for a great mass of industrious agency. In countries thus circumstanced, the condition of man is generally the most comfortable; because those, who live in idleness upon the profits of their capital and land, are better able to live on moderate profits, than those who live upon the profits of their own industry only. (ii) The profits of the man of science: The superior class of knowledge will be very ill paid; it will receive a very inadequate portion of the value of the product, to which it has contributed. It is from a sense of injustice that every nation, sufficiently enlightened to conceive the immense benefit of scientific pursuits, has endeavored, by special favors and flattering distinctions, to indemnify the man of science, for the very trifling profit derivable from his professional occupations, and from the exertion of his natural or acquired faculties. (iii) The profits of the master-agent, or adventurer, in industry; (iv) The profits of the operative laborer; (v) The independence accruing to the moderns from the advancement of industry: The ancients were not nearly so far behind the moderns in agriculture as in the mechanical arts. The increasing prosperity of manufacture and commerce has raised them in the scale of estimation. Chapter VIII. The Revenue of Capital: (i) Loans at interest: we consider the nature and motive of the interest paid by the borrower to the lender of capital; and that this interest is compounded of the rent of the capital, and of the premium of insurance against the risk of its partial or total loss. (ii) The profits of capital: This is the profit derivable from the employment of capital, whether by a borrower or by the proprietor himself. (iii) The employment of capital most beneficial to society: This is the return from investment through various different channels of industry. 137 Chapter IX. The Revenue of Land: (i) The profit of landed property: It yields nutriment and vegetative justice to the grain, the fruits, and vegetables, whereon we subsist; as well as to the forests, whereof we construct our houses, ships, and furniture, and whence we derive fuel to keep us warm the productive service of land, and thence the profit of the proprietor originates. Moreover, further benefits come from the stone, metal, coal, peat, and etc. The water of river and of ocean has the power of giving motion to machinery, affords a means of navigation, and supply of fish. The wind turns our mill, even the heat of the sum cooperates with human industry. (ii) Rent: When a farmer takes a lease of land, he pays to the proprietor the profit accruing from its productive agency and reserves to himself, besides the wages of his own industry. Chapter X. The Effect of Revenue derived by one nation from another: One nation cannot take from another the revenues of its industry. With regard to the capital lent by one nation to another, the effect upon their respective wealth is precisely analogous to that, resulting from every loan from on individual to another. With regard to landed property, as may belong to foreigners residing abroad, the revenue arising from it is an item of foreign. Chapter XI. The Mode in which the Quantity of the Product affects Population: (i) Population as connected with political economy: A man, particularly in a forward state of civilization, a variety of products, some them in the class of what have been denominated immaterial products, are necessaries of existence; these are multiplied in a degree proportionate to the desire for them, respectively, because its intensity causes a proportionate elevation of their price; and it may be laid down as a general maxim, that the population of a state is always proportionate to the sum of its production in every kind. (ii) The influence of the quantity of a national product upon the local distribution of the population: It is necessary that population should be spread over it surface; for industry and commerce to flourish, it is desirable to collect together in those spots, where arts may be exercised advantageously. 138 Book IV. The French Revolution and the Industrial Revolution,

62 BOOK III: The Consumption of Wealth: Chapter I. The Different Kinds of Consumption: All products are produced solely for the purpose of consumption, and, whenever the consumption of a product is delayed after it has reached the point of absolute maturity, it is value inert and neutralized for the time. For as all value may be employed re-productively, and made to yield a profit to the possessor, the withholding a product from consumption is a loss of the possible profit, in other words, of the interest its value would have yielded, if usefully employed. The total national consumption may be divided into the heads of public consumption and private consumption: the former is affected by the public, or in its service; the latter by individuals or families. Either class may be productive or unproductive. Chapter II. The Effect of Consumption in General: The immediate effect of consumption of every kind is, the loss of value, consequently, of wealth, to the owner of the article consumed. This is the invariable and inevitable consequence, and should never be lost sight of in reasoning on this matter. A product consumed is a value lost to all the world and to all eternity; but the further consequence, that may follow, will depend upon the circumstances and nature of the consumption. Chapter III. The Effect of Productive Consumption: The object, expended and consumed by the adventurer, is the equivalent he receives for his capital; and that, consumed unproductively by the laborer, is the equivalent for his revenue. The interchange of these two values by no means makes them one and the same. This double consumption is precisely analogous to that of raw material used in the concern. 139 Chapter IV. The Effect of Unproductive Consumption in General: The degree of correctness, with which the balance of loss and gain is struck will determine whether the consumption be judicious or otherwise; which is a point that next to the actual production of wealth, has the most powerful influence upon the well or ill-being of families and of nations. (i) The satisfaction of positive wants upon the existence, the health, and the contentment; being generated by refined sensuality, price, and caprice. (ii) Such as are the most gradual, and absorb products of the best quality. A nation or an individual, will do wisely to direct consumption chiefly to those articles that are the longest time in wearing out, and the most frequently in use. (iii) The collective consumption of numbers. There are some kinds of agency that need not be multiplied in proportion to the increased consumption. (iv) On ground entirely different, those kinds of consumption are judicious, which are consistent with moral rectitude; and on contrary, those, which infringe its laws, generally end in public, as well as private calamity. 140 Chapter V. Individual Consumption its Motives and its Effects: The consumption of individuals, as contrasted with that of the public or community at large, is such as is made with the object of satisfying the wants of families and individuals. These wants chiefly consist in those of food, raiment, lodging, and amusement. They are supplied with the necessary articles of consumption in each department, out of the respective revenue of each family or individual, whether derived from personal industry, from capital, or from land. The wealth of a family advances, declines, or remains stationary, according as its consumption equals, exceeds, or falls short of its revenue. The aggregate of the consumption of all the individuals, added to that of the government for public purposes, forms the grand total of national consumption. Chapter VI. Public Consumption: (i) The nature and general effect of public consumption; (ii) The principal objects of national expenditure; (iii) The chares for military and naval; (iv) The charges of public instruction; (v) The charges of public benevolent institutions; (vi) The charges of public edifices and works. Chapter VII. The Actual Contributors to Public Consumption: The resources consist, for the most part, of the produce of taxes levied upon the subjects or citizens. These taxes are sometimes national, that is, levied upon the whole nation, and paid into the general treasury of the state, whence the public national expenditure is defrayed; and sometimes local, or provincial, that is, levied upon the inhabitants of a separate canton or province only Book IV. The French Revolution and the Industrial Revolution,

63 Chapter VIII. Taxation: (i) The effect of all kinds of taxation in general; (ii) The different modes of assessment, and the classes they press upon respectively; (iii) Taxation in kind; (iv) The territorial or land-tax of England. Chapter IX. National Debt: (i) The contracting debt by national authority, and of its general effect: There is this grand distinction between an individual borrower and a borrowing government, that, in general, the former borrows capital for the purpose of beneficial employment, the latter for the purpose of barren consumption and expenditure. A nation borrows, either to satisfy an unlooked-for demand, or to meet an extraordinary emergency; to which ends, the loan may prove effectual or ineffectual; but, in either case, the whole sum borrowed is so much value consumed and lost, and the public revenue remains burthened with the interest upon it. (ii) Public credit, its basis, and the circumstances that endanger its solidity: Public credit is the confidence of individuals in the engagements of the ruling power, or government. This credit is at the extreme point of elevation, when the pubic creditor gets no higher interest, than he would by lending on the best private securities; which is a clear proof, that the lenders require no premium of insurance to cover the extra risk they incur, and that in their estimation there is no such extra risk. Public credit never reaches this elevation, except where the government is so constituted, as to find great difficulty in breaking its engagements, and where, moreover, its resources are known to be equal to its wants; for which latter reason, public credit is never very high, unless where the financial accounts of the nation are subject to general publicity. 142 Joseph A. Schumpeter s View on Say: But even his friends were taken in by that deceptive semblance of superficiality. Even for those French historians who were ready enough to protect his memory, he was primarily the exponent on of them said vulgarizer of A. Smith s teaching. To this merit, it is true, they added various others, of which we may take notice by anticipation: Say cast the subject matter of economics into the schema production, distribution, and consumption; its methodology owes something to him; he pointed toward a utility theory of value; he helped to establish the triad of factors land, labor, and capital; he emphasized the figure of the entrepreneur, using the term; and, of course, he was Say of Say s Law of Markets. All of this, as usually put, makes only a modest case since some of these merits are per se of minor importance or even of doubtful value. We shall comment on all of them in due course. At present, we are concerned with the fundamental error that vitiates appraisal of Say s position in the history of economics, namely with usual interpretation of his relation to A. Smith. Say s work grew from purely French sources, if we consider Cantillon a French economist. It is the Cantillon-Turgot tradition, which he carried on and from which he could have developed whatever it was he actually did all the main features of his analysis including, by the way, his systematic schema and his entrepreneur. The most important of these features, and his really great contribution to analytic economics, is his conception of economic equilibrium, hazy and imperfectly formulated though it was: Say s work is the most important of the links in the chain that leads from Cantillon and Turgot to Walras. 143 Henry W. Spiegel s View on Say: Say, being so much his junior became to know the profound scientific and technological advances of the time. Value measures the utility of a good, price measures the value; utility is created not only by those who produce tangible goods but also by those who render services in trade or transportation. His own experience with the rising industrial capitalism of his time makes him rediscover the entrepreneur, of whom Cantillon had spoken. Say s law proposes that it is production which opens a demand for products that contains a denial of the possibility of general overproduction. It is Say s incomplete treatment of the mechanism of adjustment that is stressed by those who reject the interpretation of his law as an equality in the sense here indicated. What is left of Say s law is a statement of the interdependence of total supply and total demand. The demand for product originates from the supplies of everybody else because these supplies constitutes demand. 144 Book IV. The French Revolution and the Industrial Revolution,

64 Photo IV-3-1. Thomas Robert Malthus Source: Photo IV-3-2. David Ricardo Source: Book IV. The French Revolution and the Industrial Revolution,

65 3. Neo-Classical Capitalism: Malthus and Ricardo In his Social Perspectives in the History of Economic Theory of 1972, Everett J. Burtt, Jr. describes that Although Adam Smith had urged capital investment and innovation, he could not have foreseen the magnitude and speed of the Industrial Revolution that transform British society in the fifty years after the publication of The Wealth of Nations. The rise of the factory system, based on new Textile machinery and the steam engine; the burgeoning cities, fed by a booking birth rate and an influx of population driven from the countryside by enclosures of agricultural land these were manifestations of the revolutionary changes created by the rush of private capital to take advantage of new methods of production. The rapid restructuring of the economic base of British society, which upturned tradition and challenged established centers of power, set in motion a turbulent half-century as various groups struggled to adjust and reshape British economic and political institutions to fit the emerging economic realities. British classical economics grew out of those political struggles. Following in broad outlines the theory and policy of Adam Smith, classical economists argued for complete freedom for private capital. Their objective was political; it could be achieved only if control of the machinery of government (then the landlords) shifted to the manufacturers and merchants. Paradoxically, it seemed, a policy of laissez-faire, or government noninterference, could be achieved only through political action. The classical economists participated both in political conflicts and in the controversies over pivotal economic issues such as free labor markets, monetary neutrality, and the abolition of the Corn Laws (which gave tariff protection to the landlords). The classical writer Jeremy Bentham made the reform of Britain s legal and political institutions a lifelong goal; David Ricardo, and later John Stuart Mill, were members of Parliament; and most of the economists of the period supported the great Reform Act of 1832, which finally reduced the landlords representation in Parliament. Although the first steps in freeing the labor market from the Combination Acts came earlier, 1825 and 1826, most of the economists major political victories came after Reform Act was passed. The denial of public assistance to the able-bodies unemployed, a goal long-sought by Malthus, was finally achieved with the Poor Law Amendment of Ricardo s proposal for banking and monetary reform were incorporated in the Bank Charter Act of 1844, over a decade after his death. And the Corn Laws was finally toppled by the power of landlords in The political struggle over control of the development of industrial capitalism precipitated a brilliant burst of theoretical analysis, probably unmatched in any other short period of time. David Ricardo was acknowledged as the chief exponent of the economics of the new industrialism. In the fourteen years from his first letters on economics to the Morning Chronicle to his untimely death at the age of 51 in 1823, he rose to preeminence as an economist and gave a new direction to the science of political economy. Ricardo was a deductive thinker who moved without hesitation from premise to conclusion. One of the first of many model-builders, he argued with the single-mindedness of one who knows his logic is rigorous and therefore true. He refused to recognize any difficulties in applying analytical propositions to government policy and assumed that failure to follow policy prescriptions resulted only from ignorance, a condition which, with patience, could eventually be overcome. Thomas Robert Malthus was unsympathetic to the rapid transformation of the British economy because it endangered the landlord-dominated social structure. It challenged Ricardo on many aspects of theory and policy; yet his position was an anomalous one, for he himself had contributed to Ricardo s classical economics with his theory of population and wages and his theory of rent. Nevertheless, Malthus began to find himself at odds with his good friend Ricardo ever such doctrines as free trade, theories of value and profits, and the ability of the competitive system to absorb without a depression. 145 Book IV. The French Revolution and the Industrial Revolution,

66 Thomas Robert Malthus ( ): Malthus was born into a prosperous family. His father, a friend of the philosopher and skeptic David Hume, was deeply influenced by Jean- Jacques Rousseau, whose book Émile (1762) may have been the source of the elder Malthus s liberal ideas about educating his son. The young Malthus was educated largely at home until his admission to Jesus College, Cambridge, in There he studied a wide range of subjects and took prizes in Latin and Greek, graduating in He earned his Master of Arts degree in 1791, was elected a fellow of Jesus College in 1793, and took holy orders in His unpublished pamphlet The Crisis, written in 1796, supported the newly proposed Poor Laws, which recommended establishing workhouses for the impoverished. This view ran somewhat counter to the views on poverty and population that Malthus published two years later. In 1804 Malthus married Harriet Eckersall, and in 1805 he became a professor of history and political economy at the East India Company s college at Haileybury, Hertfordshire. It was the first time in Great Britain that the words political economy had been used to designate an academic office. Malthus lived quietly at Haileybury for the remainder of his life, except for a visit to Ireland in 1817 and a trip to the Continent in In 1811 he met and became close friends with the economist David Ricardo. In 1819 Malthus was elected a fellow of the Royal Society; in 1821 he joined the Political Economy Club, whose members included Ricardo and James Mill; and in 1824 he was elected one of the 10 royal associates of the Royal Society of Literature. In 1833 he was elected to the French Académie des Sciences Morales et Politiques and to the Royal Academy of Berlin. Malthus was one of the cofounders, in 1834, of the Statistical Society of London. 146 Malthus published anonymously An Essay on the Principle of Population in 1798; and Principles of Political Economy in 1820 that challenged David Ricardo, who published Principles of Political Economy and Taxation in 1817 producing a theory of value and analyses of taxation. Malthus was attracted by William Godwin ( ) who wrote An Enquiry Concerning Political Justice in 1793 attacking on political institutions, and Things as They Are attacking aristocratic privilege. Political Justice was extremely influential in its time: after the writings of Burke and Paine, Godwin's was the most popular written response to the French Revolution. Godwin's work was seen by many as illuminating a middle way between the fiery extremes of Burke and Paine. Godwin had acknowledge that an increase in the standard of living could cause population pressures, but saw an obvious solution to avoiding distress, to be discussed later. Since Malthus s father was an ardent follower of Rousseau, it can be inferred that he was possibly attracted by Godwin s anarchistic vision of a perfect egalitarian society without government or social hierarchy; and that he may also have been sympathetic to the conclusions of another work on human perfectibility that was the Sketch for a Historical Picture of the Progress of the Human Spirit written by Marquis de Condorcet ( ). Condorcet views that the future of mankind will be in the progress of science, so that inequality among nations will banish with the spread of enlightenment (meaning proper education), which will bring to the underdeveloped world the fruits of European civilizations. As the population increases, the growth of knowledge will open up new methods of sustaining an even larger number of people. Even if the population should approach the limits of subsistence, this day will be far off. Long before, the growth of reason will prevent man from peopling the world with numbers which it cannot support. However, Condorcet was a Frenchman, and, unlike Godwin, he does not derive this conclusion from faith in man s ability to master his passions. 147 Malthus s population principles stresses the immediate nature of population pressure, which is against both Godwin and Condorcet who had noted its distant potential catastrophic effects. The feature of Malthus s Essay was comparatively alongside with such great figures as Montesquieu s Spirit of Laws (1748), Edward Gibbon s Decline and Fall of the Roman Empire (1776), and Adam Smith s Wealth of Nations (1776) Book IV. The French Revolution and the Industrial Revolution,

67 An Essay on the Principle of Population (1798): BOOK I. The Checks to Population in the less civilized parts of the world, and in past time: Chapter I. Ratios of the Increase of Population and Food: The population has this constant tendency to increase beyond the means of subsistence, and that it is kept to its necessary level by these cause, will sufficiently appear from a review of the different states of society in which man has existed. In the United States, the population has been observed to double in twenty-five years. It may be safely be pronounced that population when unchecked goes on doubling itself every twenty-five years, or increases in a geometrical ratio. Let s suppose that the present population of the whole earth without any emigration equal to a thousand millions. Then, the human species would increase as the number 1, 2, 4, 8, 16, 32, 64, 128, 256; and subsistence as 1, 2, 3, 4, 5, 6, 7, 8, 9. In two centuries, the population would be to the means of subsistence as 256 to 9; in three centuries as 4096 to 13; and in two thousand years, the difference would be almost incalculable. In this supposition, no limits whatever are placed to the produce of the earth. It may increase forever, and be greater than any assignable quantity; yet still the power of population being in every period so much superior, the increase of the human species can only be kept down to the level of the means of subsistence by the constant operation of the strong law of necessity acting as a check upon the greater power. In the United States, the population has been observed to double in twenty-five years. Agricultural statistics at Malthus s time was virtually nonexistent; and his empirical evidence for the arithmetical progression of the food supply was weaker than that for the geometric progression of the population. 149 Chapter II. The General Checks to Population, and the mode of their operation: The checks to population, which are constantly operating with more or less force in every society, and keep down the number to the level of the means of subsistence, may be classed under the preventive and the positive check. The preventive checks is to prevent the birth of children to such as a degree as a promiscuous intercourse, unnatural passions, violations of the marriage bed, irregular arts to conceal the consequences of irregular connections; which are vice; and the restraint from marriage may be properly termed moral restraint. The positive checks to population are extremely various, and include every cause, whether arising from vise or misery. Under this head, therefore, may be enumerated, all unwholesome occupations, severe labor and exposure to the seasons, extreme poverty, bad nursing of children, great towns, excesses of all kinds, the whole train of common diseases and epidemics, wars, pestilence, plague, and famine. [1806 version] The sum of all these preventive and positive checks, taken together, forms the immediate check to population; and it is evident that, in every country where the whole of the procreative power cannot be called into action, the preventive and the positive checks must vary inversely as each other; that it, in countries either naturally unhealthy, or subject to a great mortality, from whatever cause it may arise, the preventive checks will prevail very little. In those countries, on the contrary, which are naturally healthy, and where the preventive check is found to prevail with considerable force, the positive check will prevail very little, or the mortality be very small. If the population increases before the food supplies have expanded, food prices will rise and real wages will fall. In the ensuing distress, population growth temporarily comes to a halt. Meanwhile, the reduction of wages encourages the increased employment of labor on the land, food supplies rise, and eventually a new stimulus to population growth sets in motion a renewed oscillation. 150 Table IV-3-1. The Population Growth and Subsistence Level by Thomas R. Malthus Year Population Subsistence Source: Henry W. Spiegel, The Growth of Economic Thought (Durham, NC: Duke U. P., 1971), 272. Book IV. The French Revolution and the Industrial Revolution,

68 Without attempting to establish these progressive and retrograde movements in different countries, which would evidently require more minute histories than we possess, the following propositions are intended to be proved: (i) Population is necessarily limited by the means of subsistence. (ii) Population invariably increases, where the means of subsistence increase, unless prevented by some very powerful and obvious checks. (iii) These checks, and the checks which repress the superior power of population, and keep its effects on a level with the means of subsistence, are all into moral restraint, vice, and misery. The first of these propositions scarcely needs illustration. The second and third will be sufficiently established by a review of the past and present state of society. This review will be the subject of the following chapters. 151 BOOK II. The Check to Population in the Different States of Modern Europe: Chapters I to XII are omitted. Chapter VIII. General Deductions from the preceding view of Society: It has appeared from the registers of different countries, which have already been produced, that the progress of their population is checked by the periodical though irregular returns of plagues, pestilences, and famines resulting in insufficient and unhealthy food. The small-pox is considered as the most prevalent and fatal epidemic in Europe. The highest average proportion of births to deaths in England may be considered as about 12 to 10, and that in France about 115 to 100 for ten years ending 1780 in France. The only true criterion of a real and permanent increase in the population of any country is the increase of the means of subsistence. In every country where the population is not absolutely decreasing, the food must be necessarily sufficient to support and to continue the race of laborers. War, the predominant check to the population of savage nations, have certainly abated, even including the late unhappy revolutionary contests; and since the prevalence of a greater degree of personal cleanliness, of better modes of clearing and building towns, and of a more equable distribution of the products of the soil from improving knowledge in political economy, plagues, violent diseases, and famines have been certainly mitigated, and have become less frequent. With regard to the preventive checks to population, moral restraint does not at present prevail much among the male part of society. 152 BOOK III. The Different Systems or Expedients which have been proposed or have prevailed in society, as they affect the evils arising from the principle of population: Chapter I. Systems of Equality Wallace and Condorcet: Condorcet's Sketch for a Historical Picture of the Progress of the Human Spirit (1795) was perhaps the most influential formulation of the idea of progress ever written. It made the Idea of Progress a central concern of Enlightenment thought. He argued that expanding knowledge in the natural and social sciences would lead to an ever more just world of individual freedom, material affluence, and moral compassion. He argued for three general propositions: that the past revealed an order that could be understood in terms of the progressive development of human capabilities, showing that humanity's present state, and those through which it has passed, are a necessary constitution of the moral composition of humankind; that the progress of the natural sciences must be followed by progress in the moral and political sciences no less certain, no less secure from political revolutions; that social evils are the result of ignorance and error rather than an inevitable consequence of human nature. 153 Nevertheless, Malthus was negative to the Condorcet s proposition of the organic perfectibility of man - the number of men shall surpass their means of subsistence by the improvement of science: A candid investigation of these subjects accompanied with a perfect readiness to adopt any theory warranted by sound philosophy, may have a tendency to convince them that they are contracting it; they are throwing us back again almost into the infancy of knowledge; and weakening the foundations of that mode of philosophizing, under the auspices of which science has of late made such rapid advances. The late rage for wide and unrestrained speculation seems to have been a kind of mental intoxication, arising from the unexpected discoveries in various branches of science Book IV. The French Revolution and the Industrial Revolution,

69 Chapter II-III. Systems of Equality Godwin: In his Political Justice, Godwin views that There is a principle in human society, by which population is perfectually kept down to the level of the means of subsistence. But where population pressure operates, it is the result of wicked institutions rather than of an inexorable refusal of nature to yield needed supplies. Under such institutions, agricultural production in Europe is restricted by territorial monopoly. Were it not so, five times as many people could be maintained. Moreover, three-fourths of the inhabitable earth, taken as a whole, is under-cultivated. With agricultural productivity on the rise, myriads of centuries of still increasing population may pass away, and the earth be yet found sufficient for the support of its inhabitants. 155 Malthus views against Godwin that, first, as the fertility of the land increased, and various accidents occurred, the shares of some men might be much more than sufficient for their support; and that, when the reign of self-love was once established, they would not distribute their surplus produce without some compensation in return. It seems highly probable that an administration of property would be established for the evils which were pressing on the society. Second, the most natural and obvious check seemed to be to make every man provide for his own children; which would operate in some respect as a measure and a guide in the increase of population. The disgrace and inconvenience attending such a conduct would fall upon that individual who had thus inconsiderately plunged himself and his innocent children into want and misery. When these two fundamental laws of society, the security of property and the institution of marriage, were once established, inequality of condition must necessarily follow. Those who were born after the division of property would come into a world already possessed. If their parents, from having too large a family, were unable to give them sufficient for their support, what could they do in a world where everything was appropriated? In this regard, no reason can be assigned why population should not increase faster than in any known instance. 156 Chapter IV. Emigration: In the accounts which we have received of the peopling of new countries, the dangers, difficulties, and hardships that the first settlers have had to struggle with, appear to be even greater than we can well imagine that they could be exposed to in their parent state. The endeavor to avoid that degree of unhappiness arising from the difficulty of supporting a family might long have left the new world of America unpeopled by Europeans, if those more powerful passions, the thirst of gain, the spirit of adventure, and religious enthusiasm, had not directed and animated the enterprise. The passions enabled the first adventurers to triumph over every obstacle, but in many instances in a way to make humanity shudder, and to defeat the true end of emigration. The frequent failures in the establishment of new colonies tend strongly to show the order of precedence between food and population. The distress arising from a too rapidly increasing population could not allow to begin a new colony in a distant country. However, when new colonies have been once securely established, the difficulty of emigration is very considerably diminished. The necessary resources for transport and maintenance care frequently furnished by individuals or private companies. If the population rose unrestrictively there, emigration is not adequate. [1817 version] The progress of population is mainly regulated by the effective demand for labor, but it is obvious that the number of people cannot conform itself immediately to the state of this demand. Under this circumstances, emigration is most useful as a temporary relief; and Great Britain find herself placed at present. Though no emigration should take place, the population will by degrees conform itself to the state of the demand for labor, but the interval must be marked by the most severe distress, the amount of which can scarcely be reduced by any human effort, because, though it may be mitigated at particular periods, and as it affects particular classes, it will be proportionally extended over a large space of time and a greater number of people. The only real relief in such a case is emigration; and the subject at the present moment is well worthy the attention of the government, both as a matter of humanity and policy. 157 Book IV. The French Revolution and the Industrial Revolution,

70 Chapter V-VII. The English Poor Laws: The English Poor Laws can be traced back as far as 1536, when legislation was passed to deal with the impotent poor, although there is much earlier Tudor legislation dealing with the problems caused by vagrants and beggars. The history of the Poor Law in England and Wales is usually divided between two statutes, the Old Poor Law passed during the reign of Elizabeth I and the New Poor Law, passed in 1834, which significantly modified the existing system of poor relief. The later statute altered the Poor Law system from one which was administered haphazardly at a local parish level to a highly centralized system which encouraged the large-scale development of workhouses by Poor Law Unions. This Poor Law Amendment Act aimed mainly to reduce the burden on rate payers. Nevertheless, Malthus views that the transfer of additional shillings of the rich to each laborer would not increase the quantity of meat in the country, but would raise the price; so that a part of society must find it difficult to support a family, which difficulty will naturally fall on the least fortunate members. The price of labor - expressing the relation between the supply of provisions and the demand for them; between the quantity to be consumed and the numbers of consumers - will be just sufficient to support the present population. The poor laws tend to depress the general condition of the poor in two ways: first is to increase population without increasing the food for its support; and second is that the quantity of provisions consumed diminishes the shares that would otherwise belong to more industrious and worth members. The radical defect of all systems is that of tending to increase population, without increasing the means for its support, and by thus depressing the condition of those that are not relieved by parishes, to create more poor. What Malthus has proposed is the gradual and very gradual abolition of the poor laws. The improved condition of the laboring classes in France since the revolution has been accompanied by a greatly diminished proportion of birth, which has had its natural and necessary effect in giving to these classes a greater share of the produce of the country; making individuals depend less upon others. 158 Chapter VIII-X. Agriculture, Commerce, and Combined Systems: In agriculture of America, a large proportion of capital stock has kept up a steady and continued demand for labor, and high wages and profits allowed them to feed themselves better, and the progress of population became rapid. In commerce, advantages depending exclusively upon capital and skill, and the present possession of particular channels of commerce cannot be permanent. Even if it were possible to exclude any formidable foreign competition, domestic competition produces almost unavoidably the same effects. A country, which is obliged to purchase both the raw materials and the means of subsistence from foreign countries, is almost entirely dependent, for the increase of its wealth and its population, on the increasing wealth and trade demands of the countries. A nation, obliged to purchase from others nearly the whole of its raw materials and the means of its subsistence, is not only dependent entirely upon the demands of its customers, but also it is subjected to a necessary and unavoidable diminution of demand. In both agriculture and commerce combined, (i) land is practically almost always understocked with capital: farms are held by discouraging the transfer of capital from commerce and manufactures. (ii) If new and superior modes of cultivation be invented, better managed with lass labor, it is obvious that inferior land may be cultivated at higher profits than could be obtained from richer land before, but a greater increase of capital may yield smaller proportionate returns. (iii) Increased skill and new machinery in manufactures produce more quantities and reduce their prices, which allows them to use less proportion of their income, which may increase capital and extension of cultivation. (iv) If foreign commerce is prosperous, prices of labor and domestic commodities would rise considerably, while foreign commodity prices are advanced comparatively very little. (v) The tendency of a continually increasing capital and extending cultivation causes a progressive fall of profits and wages; yet the causes above enumerated are evidently sufficient to account for great and long irregularities in this progress Book IV. The French Revolution and the Industrial Revolution,

71 Chapter XI-XII. Corn-Laws: The British Corn Laws imposed restrictions and tariffs on imported grain from 1815 and 1846; and they were designed to keep grain prices high in favor of domestic producers. The laws did indeed raise food prices and became the focus of opposition from urban groups who had far less political power than rural Britain. The Corn Laws imposed steep import duties, making it too expensive to import grain from abroad, even when food supplies were short. The laws were supported by conservative landowners and opposed by industrialists and workers. The Anti-Corn Law League was responsible for turning public and elite opinion against the laws. It was a large, nationwide middle-class moral crusade with a Utopian vision. 160 Malthus supports the Corn Laws to avoid increasing dependency on foreign goods, to encourage agricultural improvement, and to control expanding manufacturing with the cost of agriculture. The concentration of urban employment is unhealthy, and employment in manufacture is essentially unstable. 161 Malthus obviously fears rapid industrialization of capitalism, disturbing the society dominated by the landlords. (i) Bounties upon exportation: When an average excess of corn growth for exportation had been obtained by the stimulus of a bounty, the foreign demand for our corn had increased at the same rate as the domestic demand, then our surplus growth might have become permanent. After the bounty had ceased to stimulate to fresh exertions, its influence would by no means be lost. (ii) The monopoly of the colony trade, by raising the rate of mercantile profit, discourages the improvement of the soil, and retards the natural increase of that great original source of revenue the rent of land. Restrictions upon the importation of foreign corn, in a country which has great landed resource, not only tend to spread every commercial and manufacturing advantage possessed, whether permanent or temporary, on the soil, and secure and realize it; but also tend to prevent those great oscillations in the progress of agriculture and commerce which are seldom unattended with evil. 162 Chapter XIII. Increasing Wealth: In the natural and regular progress of a country to a state of great wealth and population, there are considerable disadvantages; and they would be sufficient to render the progress of riches decidedly unfavorable to the condition of the poor, if they were not counteracted by advantages counterbalancing them. (i) It is obvious that the profits of stock are that source of revenue from which the middle classes are chiefly maintained; and the increase of capital, which is both the cause and effect of increasing riches, may be said to be the efficient cause of the emancipation of the great body of society from a dependence of the landlords. The landlords could in no other way spend their incomes than by maintaining a great number of idle followers; and it was by the growth of capital in all the employments to which it is directed that the pernicious power of the landlords was destroyed, and their dependent followers were turned into merchants, manufacturers, tradesmen, farmers, and independent laborers a change of prodigious advantage to the great body of society, including the laboring classes. (ii) In the natural progress of cultivation and wealth, the production of an additional quantity of corn will require more labor, while, at the same time, from the accumulation and better distribution of capital, the continual improvements made in machinery, and the facilities opened to foreign commerce, manufactures and foreign commodities will be produced or purchased with less labor; and consequently a given quantity of corn will command a much greater quantity of manufactures and foreign commodities than while the country was poor. (iii) The lower classes of society seldom acquire a decided taste for conveniences and comforts till they become plentiful compared with food, which they never do till food has become in some degree scarce. If the laborer can obtain the full support of himself and family by two or three days labor; and if, to furnish himself with conveniences and comforts, he must work three or four days more, he will think the sacrifice too great compared with the objects to be obtained, which are strictly necessary to him, and will often prefer the luxury of idleness to the luxury of improved lodging and clothing. 163 Book IV. The French Revolution and the Industrial Revolution,

72 BOOK IV. Our Future Prospects respecting the removal or mitigation of the evils arising from the principle of population: Chapter I. Moral Restraint and the foundations of our obligation to practice this virtue: If moral restraint be the only virtuous mode of avoiding the incidental evils arising from this principle, our obligation to practice it will evidently rest exactly upon the same foundation as our obligation to practice any of the other virtues, the foundation of utility. Chapter II. The Effects which would result to Society from the general practice of this virtue: The heathen moralists never represented happiness as attainable on earth, but through the medium of virtue; and among their virtues, prudence ranked in the first class, and by some was even considered as including every other. The Christian religion places our present as well as future happiness in the exercise of those virtues which tend to fit us for a state of superior enjoyment; and the subjection of the passions to the guidance of reason, which, if not the whole, is a principal branch of prudence, is in consequence most inculcated. Chapter III. The Effectual Mode of improving the condition of the Poor: We are not to relax our efforts in increasing the quantity of provisions, but to combine another effort with it; that of keeping the population, when once it has been overtaken, at such a distance behind as to effect the relative proportion which we desire, and thus unite the two grand desiderata, a great actual population, and a state of society in which poverty and dependence are comparatively but little known; tow objects which are far from being compatible. Chapter IV. Objections to this Mode Considered: One objection is that from which alone it derives its value a market rather understocked with labor. A second objection that may be made to this plan is the relative diminution of population that it would cause. A third objection is that by endeavoring to urge the duty of moral restraint on the poor, we may increase the quantity of vice relating to the sex. Chapter V. The Consequences of pursuing the Opposite Mode: In a civilized society, where a taste for the decencies and comforts of life prevails among a very large class of people, it is not possible that the encouragements to marriage from positive institutions and prevailing opinions should entirely obscure the light of nature and reason on this subject; but still they contribute to make it comparatively weak and indistinct. 164 Chapter VI-VII. Effect of the Knowledge of the principal cause of poverty on Civil Liberty: I tis a truth, which I trust has been sufficiently proved in the course of this work, that under a government constructed upon the best and purest principles, and executed by men of the highest talents and integrity, the most squalid poverty and wretchedness might universally prevail from the principle of population alone. Chapter VIII. Plan of the gradual abolition of the Poor Laws proposed: If the plan which I have proposed were adopted, that poor s rates in a few years would begin very rapidly to decrease, and in no great length of time would be completely extinguished; and yet, as far as it appears to me at present, no individual would be either deceived or injured, and consequently no person could have a just right to complain. The abolition of the poor-laws is not of itself sufficient; and the obvious answer to those who lay too much stress upon this system is to desire them to look at the state of the poor in some other countries, where such laws do not prevail, and to compare it with their condition in England. Chapter IX. The Mode of Correcting the prevailing opinions on the subject of Population: In an attempt to better the condition of the lower classes of society, our object should be to raise this standard as high as possible, by cultivating a spirit of independence, a decent price, and a tastes for cleanliness and comfort among the poor. These habits would be best inculcated by a system of general education and, when strongly fixed, would be the most powerful means of preventing their marrying with the prospect of being obliged to forfeit such advantages; and would consequently raise them nearer to the middle classes of society. Chapter X. The Direction of our Charity: If we keep the criterion of utility constantly in view, we may find ample room for the exercise of our benevolence without interfering with the great purpose which we have to accomplish Book IV. The French Revolution and the Industrial Revolution,

73 Principles of Political Economy (1820): BOOK I. Chapter I. The Definitions of Wealth and of Productive Labor: [Section I] The definition of wealth: I shall define wealth to be the material objects, necessary, useful, or agreeable to man, which are voluntarily appropriated by individuals or nations. The definition thus limited includes nearly all the objects which usually enter into our conceptions when we speak of wealth or riches. [II] Productive labor: Malthus substitutes the term personal services for unproductive labor of Adam Smith. Labor may then be distinguished into two kinds: productive labor and personal service. 166 Chapter II. The Nature, Causes, and Measures of Value: [Section I] The different sorts of value: (i) Value in use, which may be defined to be the intrinsic utility of an object; (ii) Nominal value in exchange, or price, which, unless something else is specifically referred to, may be defined to be the value of commodities estimated in the precious metals; and (iii) Intrinsic value in exchange, which may be defined to be the power of purchasing arising from intrinsic causes, in which sense, the value of an object is understood when noting further is added. This definition is precisely equivalent to the estimation in which a commodity is held, founded on the desire to possess, and the difficulty of obtaining possession of it; and accords entirely with the definition of the exchangeable value of a commodity; which is determined by the state of the supply compared with the demand, and ordinarily by the elementary cost of production. 167 [II] Demand and supply as they affect exchangeable value: The prices of commodities will depend upon the relation of the demand to the supply; or will vary as the demand directly, and the supply inversely. [III] The cost of production as affected by the demand and supply, and on the node of representing demand: The permanent prices of the great mass of commodities will be determined by the ordinary cost of their production. The relation of supply to the demand is the dominant principle in the determination of prices whether market or natural, and that the cost of production can do nothing but in subordination to it, that is, merely as it affects the ordinary relation which the supply bears to the demand. [IV] The labor as a measure of its exchange value: Malthus quotes from Adam Smith: the value of any commodity is equal to the quantity of labor which it enables him to purchase or command. Labor, therefore, is the real measure of the exchangeable value of all commodities. [VII] The variation in the value of money: A measure must itself increase or decrease according to quantity. The standard labor of a country which is actually employed, and in the district where the demand is made for it, is the only object the value of which is proportioned to its quantity, under the greatest differences both in place and time. 168 Chapter III. The Rent of Land: [Section I] The nature and causes of rent: Rent is the excess of the value of the whole produce, or if estimated in money, the excess of the price of the whole produce, above what is necessary to pay the wages of the labor and the profits of the capital employed in cultivation, the first object which present itself for inquiry, is, the cause or causes of this excess of price. [II] The necessary separation of the rent of land from the profits of the cultivator and the wages of the laborer: Rent has been traced with that general surplus from the land, which is the result of certain qualities of the soil and its produce; and it has been found to commence its separation from profits and wages, as soon as they begin to fall from the scarcity of fertile land whether occasioned by the natural progress of a country towards wealth and population, or by any premature and unnecessary monopoly of the soil. [III] The causes tending to raise rents are four: 1 st, such an accumulation of capital compared with the means of employing it, as will lower the profits of stock; 2 nd ly, such an increase of population as will lower the corn wages of labor; 3 rd ly, such agricultural improvements, or such increase of exertions as will diminish the number of laborers necessary to produce a give effect; and 4 th ly, such an increase in the price of agricultural produce, from increased demand, as, while it probably raises the money price of labor, or occasions a fall in the value of money, is nevertheless, accompanied by a diminution. 169 Book IV. The French Revolution and the Industrial Revolution,

74 [IV] The causes tending to lower rents are in diminished capital, diminished population, an operose system of cultivation, and a falling price of raw produce from deficiency of demand. They are almost always indications of poverty and decline, and are necessarily connected with the throwing of inferior land out of cultivation, and the continued deterioration of the land of a superior quality. The necessary effects of a diminished capital and diminished population in lowering rents are too obvious to require explanation; nor is it less clear that an operose and bad system of cultivation might prevent the formation of rents, even on fertile land, by checking the progress of population and demand beyond what could be supplied from the very richest qualities of soil. [V] The dependence of the actual quantity of produce obtained from the land, upon the existing prices of produce, and existing rents, under the same agricultural skill and the same value of money: [VI] The connection between great comparative wealth, and a high comparative price of raw produce: [VII] The causes which may mislead the landlord in letting his lands, to the injury both of himself and the country: In re-renting his farms, the landlord is liable to fall into two errors, which are almost equally prejudicial to his own interests, and to those of his country: one is that he may be offered by farmers bidding against each other, to let his land to a tenant without sufficient capital to cultivate it in the best way, and make the necessary improvements upon it; the other is that a mere temporary rise of prices is for a rise of sufficient duration to warrant an increase of rents. [VIII] The necessary connection of the interests of landlord and of the state: Ricardo says that the interest of the landlord is always opposed to that of the consumer and the manufacturer; but Malthus is against him. If the landlord s income is practically found to depend chiefly upon natural fertility of soil, improvements in agriculture, and inventions to save labor, we may still think, with Adam Smith, that the landlord s interest is not opposed to that of the country. 170 Chapter IV. The Wages of Labor: [Section I] The wages of labor may be divided into nominal and real: the nominal wages of labor are paid by money; the real wages of labor consist of the necessaries, conveniences, and luxuries of life, which the money wages of the laborer enable him to purchase. [II] The condition of the laboring classes of society must evidently depend, partly upon the rate at which the funds for the maintenance of labor and the demand for labor are increasing; and partly, on the habits of the people in respect to their food, clothing, and lodging. [III] The causes influencing the demand for labor, and the increase of the population: When the population of a country increases faster than usual for any time together, the laboring classes must have the command of a greater quantity of food than they had before possessed, or at least than they had before applied to the maintenance of their families. But actual application of the greater quantity of food seems to be necessary to the increase of population; and wherever such increase has taken place, some of these causes, by which a greater quantity of food is procured, will always be in action, and may generally be traced. [IV] A review of corn wages of labor: The fully employed laborers have been able to purchase a more than usual quantity of wheat. The specific evil of the present times in regard to agricultural laborers is, that from the low price of corn as compared with the price of labor and the other out-goings of the farmer, he is unable to farm with spirit, and the consequence is that a considerable number of men are unemployed except by the parish. Nothing can show more clearly that a brisk demand for laborers depends upon an increase of the funds for their maintenance, without a proportionate fall in their value. [V] Conclusion: Certain it is that corn was very cheap both in France and England; and labor in this country could not possibly have risen and kept high for so long a period as between sixty and seventy years, unless some peculiar cause or causes had restrained the supply of population, compared with the supply of corn and the demand for labor. Therefore, we must consider the increase of the funds specifically destined for the maintenance of labor, instead either of the increase of wealth, the increase of capital, or the increase in the exchangeable value of the whole produce Book IV. The French Revolution and the Industrial Revolution,

75 Chapter V. The Profits of Capital: [Section I] The nature of profits: It has been usual in speaking of that portion of the national revenue which goes to the capitalist in return for the employment of his capital, to call it by the name of the profit of stock. The profits of capital consist of the difference between the value of a commodity produced, and the value of the advances necessary to produce it, and these advances consist of accumulations generally made up of wages, rents, taxes, interest, and profits. [II] The limiting principle of profits: The productive powers of labor as applied to the cultivation of land must gradually diminish; and as a given quantity of labor would yield a smaller and smaller return, there would evidently be a less and less produce to be divided between labor and profits. In the progress of improvement, as poorer and poorer land is taken into cultivation, the general rate of profits must be limited by the powers of the soil last cultivated. If the last land taken into cultivation will only yield a certain excess of value above the lowest value of the capital necessary to produce, it is obvious that profits, generally cannot possibly be higher than this excess will allow. [III] The regulating principle of profits: The varying value of the produce of the same quantity of labor on the same value of capital, determined by the state of the demand and supply. As capital and produce increased faster than labor, the profits of capital would fall, and if a progressive increase of capital and produce were to take place, while the population were prevented from keeping pace with it, notwithstanding the fertility of the soil and the plenty of food, then profits would be gradually reduced, until, by successive reductions, the power and will to accumulate had ceased to operate. [IV] Profits affected by causes: poor land into cultivation; an increase of personal exertion among the laboring classes; the unequal rise of some parts of the farmer s capital; a fall in the prices of some important manufactures, as compared with corn. [V] Ricardo s theory of profits: Profits depend upon the quantity of labor requisite to provide necessaries for the laborers on that land, or with that capital yielding no rent. 172 Chapter VI. Distinction between Wealth and Value: The wealth of a country depends partly upon the quantity of produce obtained by its labor, and partly upon such an adaptation of this quantity to the wants and powers of the existing population as is calculated to give it value. The value set upon commodities it is the sacrifice of labor or of labors worth which people are willing to make in order to obtain them, that in the actual state of things may be said to be almost the sole cause of the existence of wealth. Wealth has nothing to do with exchangeable value. 173 BOOK II. Chapter I. The Progress of Wealth: [Section II] The increase of population considered as a stimulus to the continued increase of wealth: an increase of population is the sole stimulus necessary to the increase of wealth, because population, being the great source of consumption, must in their opinion necessarily keep up demand for an increase of produce, which will naturally be followed by a continued increase of supply. [III] Accumulation or the saving from revenue to add to capital: No permanent and continued increase of wealth can take place without a continued increase of capital. [IV] The fertility of the soil is a stimulus to the continued increase of wealth. [V] Inventions to save labor: The three great causes most favorable to production are accumulation of capital, fertility of soil, and inventions to save labor. They all act in the same direction and as they all tend to facilitate supply, without reference to demand, it is not probable that they should either separately or conjointly afford an adequate stimulus to the continued increased of wealth. [VI] The necessity of a union of the powers of production with the means of distribution in order to ensure a continued increase of wealth: In general, an increase of produce and an increase of value go on together; and this is that natural and healthy state of things, which is most favorable to the progress of wealth. An increase in the quantity of produce depends chiefly upon the power of production, and an increase in the value of produce upon its distribution. Production and distribution are the two grand elements of wealth, which, combined in their due proportions, are capable of carrying the riches and population of the earth. 174 Book IV. The French Revolution and the Industrial Revolution,

76 [VII] The distribution occasioned by the division of landed property: The main causes favorable to that increase of values which depends upon distribution are, 1 st, the division of landed property; 2 nd ly, internal and external commerce; and 3 rd ly, the maintenance of an adequate proportion of the society employed in personal services, or otherwise entitled to make a demand for material products without contributing directly to their supply. The first main course is the division of landed property such as in the settlement of colonization. Without a facility of obtaining land in small portions by those who have accumulated small capitals, and of new proprietors settling upon the soil, as new families branch off from the parent stocks, no adequate effect can be given to the principle of population. 175 [VIII] The distribution occasioned by internal and external commerce is considered as the second main cause favorable to that increase of exchangeable value. Every exchange which takes place in a country, effects a distribution of its produce better adapted to the wants of the society. It is with regard to both parties concerned, an exchange of what is wanted less for what is wanted more, and must therefore raise the value of both the products. If two districts, one of which possessed a rich copper mine, and the other a rich tin mine, had always been separated by an impassable river or mountain, there can be no doubt that on eh opening of a communication, a greater demand would take place, and a greater price be given both for tin and copper; and this greater price of both metals, though it might only be temporary, would alone go a great way towards furnishing the additional capital wanted to supply the additional demand; and the capitals of both districts, and the products of both mines, would be increased both in quantity and value to a degree which could not have taken place without this new distribution of the produce, or some event equivalent to it. Similarly, foreign trade increases national income. [IX] The distribution occasioned by personal services and unproductive consumers, is the third main cause to increase the exchangeable value of produce. Under a rapid accumulation of capital, or a rapid conversion of persons engaged in personal service into productive laborers, the demand, compared with the supply of material products, would prematurely fail, and the motive to further accumulation be checked, before it was checked by the exhaustion of the land. It follows that, without supposing the productive classes to consume much more than they are found to do by experience, particularly when they are rapidly saving from revenue to add to their capitals, it is necessary that a country with great powers of production should possess a body of consumer who are not themselves engaged in production. Malthus concerns about a lack of effective demand coming from under-consumption or over-saving: the excessive saving destroys the motive to production, but the excessive consumption reduces saving and investment, which cuts down production. An optimum propensity to consume is essential to balance the demand and supply in both long and short run: his population doctrine was a matter of long run, but his theory on effective demand was a matter of short run. National saving, therefore, considered as the means of increased production, is confined within much narrower limit than individual saving. While some individuals continue to spend, other individuals may continue to save to a very great extent; but the national saving, in reference to the whole mass of producers and consumers, must necessarily be limited by the amount which can be advantageously employed in supplying the demand for produce; and to create this demand, there must be an adequate and effective consumption either among the producers themselves, or other classes of consumers. 176 [X] The capital of the country does not bear an adequate proportion to the population; the capital and revenue together do not bear so great a proportion as they did before 1815; and such a disproportion will at once account for very great distress among the laboring classes. But it is very different thing to allow that the capital is deficient compared with the population; deficient compared with the demand for it; and the demand for the commodities procured by it Book IV. The French Revolution and the Industrial Revolution,

77 David Ricardo ( ) Ricardo was the third son born to a family of Sephardic Jews who had emigrated from the Netherlands to England. At the age of 14 he entered into business with his father, who had made a fortune on the London Stock Exchange. By the time he was 21, however, he had broken with his father over religion, become a Unitarian, and married a Quaker. He continued as a member of the stock exchange, where his talents and character won him the support of an eminent banking house. He did so well that in a few years he acquired a fortune, which allowed him to pursue interests in literature and science, particularly in the fields of mathematics, chemistry, and geology. Ricardo s interest in economic questions arose in 1799 when he read Adam Smith s Wealth of Nations. For 10 years he studied economics, somewhat offhandedly at first and then with greater concentration. His first published work was The High Price of Bullion, a Proof of the Depreciation of Bank Notes (1810), an outgrowth of letters Ricardo had published in the Morning Chronicle the year before. His book refueled the controversy then surrounding the Bank of England: freed from the necessity of cash payment, both the Bank of England and the rural banks had increased their note issues and the volume of their lending. The directors of the Bank of England maintained that the subsequent increase in prices and the depreciation of the pound had no relation to the increase in bank credit. Ricardo and others, however, asserted that there indeed was a link between the volume of bank notes and the level of prices. Furthermore, they argued that the price levels in turn affected foreign exchange rates and the inflow or outflow of gold. It followed, then, that the bank, as custodian of the central gold reserve of the country, had to shape its lending policy according to general economic conditions and exercise control over the volume of money and credit. 178 Entering Parliament as a member in 1819, Ricardo not only argued for financial and monetary issues (repealing the Bank Restriction Act) but also pursued parliamentary reform, voting rights, and old age pension. In the preface of his Principles of Political Economy and Taxation of 1817, the produce of the earth all that is derived from its surface by the united application of labor, machinery, and capital, is divided among three classes of the community, namely, the proprietor of the land, the owner of the stock or capital necessary for its cultivation, and the laborers by whose industry it is cultivated. But in different states of society, the proportions of the whole produce of the earth which will be allotted to each of these classes, under the name of rent, profit, and wages, will be essentially different; depending mainly on the actual fertility of the soil, on the accumulation of capital and population, and the skill, ingenuity, and instruments employed in agriculture. Chapter I. On Value: The value of a commodity depends on the relative quantity of labor that is necessary for its production, and not on the more or less compensation paid for that labor: Ricardo, like Smith, views the three classes of society: landowners, capitalists, and laborers who receive rent, profit, and wage respectively. Ricardo considers two types of commodity values: use value and exchange value. Commodities derive their exchange value having utility, scarcity, and labor. The exchange value of a commodity depends on the relative quantity of labor, which is necessary for its production. Ricardo s labor theory of value differs from Smith s standard measure of value by considering the lack of labor homogeneity and employment of capital. The different quality of labor causes different value per unit labor; the proportion of capital and labor varies in different processes of production; the proportion of fixed and circulating capital varies; and the durability of fixed capital as well as the turnover rate of circulating capital varies. 179 Ricardo s theory of value can be interpreted as a cost of production theory in present days except his exclusion of rent in its cost. A rise in wages, from an alteration in the value of money, produces a general effect on price, but makes no difference in the rate of profits. However, from a difficulty of procuring the necessaries on which wages are expended, does not, except in some instances, produce the effect of raising price, but has a great effect in lowering profits. 180 Book IV. The French Revolution and the Industrial Revolution,

78 Chapter II. On Rent: Rent is that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil. It is often confounded with the interest and profit of capital, and, is applied to whatever is paid by a farmer to his landlord. On the first settling of a country in which there is an abundance of rich and fertile land, a very small proportion of which is required to be cultivated for the support of the actual population, so that no one would pay for the use of land. When in the progress of society, land of the second degree of fertility is taken in cultivation, rent immediately commences on that of the first quality, and the amount of that rent will depend on the difference in the quality of these two portions of land. When land of the third quality is taken into cultivation, rent immediately commences on the second, and it is regulated as before by the difference in their productive powers. At the same time, the rent of the first quality will rise, for that must always be above the rent of the second by the difference between the produce which they yield with a given quantity of capital and labor (which is the difference in the costs of production between the first and second nature of land). With every step in the progress of population, which shall oblige a country to have recourse to land of a worse quality, to enable it to raise its supply of food, rent, on all the more fertile land, will rise. It is true that on the best land, the same produce would still be obtained with the same labor as before, but its value would be enhanced in consequence of the diminished returns obtained by those who employed fresh labor and stock on the less fertile land, since more labor is required on the inferior lands, and since it is from such land only that we are able to furnish ourselves with the additional supply of raw produce, the comparative value of that produce will continue permanently above its former level, and make it exchange for more commodities in the production of which no such additional quantity of labor is required. The price of commodities produced in this land will cover the cost of production incurred at the extensive margin of cultivation (marginal principle). Rent is surplus that accrues to the landlord, but is no part of the cost of production. 181 Chapter IV. On Natural and Market Price: In making labor the foundation of the value of commodities, and the comparative quantity of labor which is necessary to their production, the rule which determine the respective quantities of goods which shall be given in exchange for each other, we must not be supposed to deny the accidental and temporary deviations of the actual or market price of commodities from this, their primary and natural price. With the rise or fall of price, profits are elevated above, or depressed below, their general level; and capital is either encouraged to enter into, or is warned to depart from, the particular employment in which the variation has taken place. A capitalist, in seeking profitable employment for his funds, will naturally take into consideration all the advantages which one occupation possesses over another. Let us suppose that all commodities are at their natural price, and consequently that the profits of capital in all employments are exactly at the same rate, or differ only so much as, in the estimation of the parties, is equivalent to any real or fancied advantage which they possess or forego. Suppose now that a change of fashion should increase the demand for silks and lessen that for woolens; their natural price, the quantity of labor necessary to their production, would continue unaltered, but the market price of skills would rise and that of woolens would fall; and consequently the profits of the silk manufacturer would be below, the general and adjusted rate of profits. Not only the profits, but the wages of the workmen, would be affected in these employments. This increased demand for silk would, however, soon by supplied by the transference of capital and labor from the woolen to the silk manufacture; when the marked prices of silk and woolens would again approach their natural prices, and then the usual profits would be obtained by the respective manufacturers of those commodities. It is then the desire of diverting his funds from a less to a more profitable employment that prevents the market price of commodities from continuing for any length of time either much above or much below their natural price Book IV. The French Revolution and the Industrial Revolution,

79 Chapter V. On Wages: Labor has its natural and market price. The natural price of labor is the natural rate of wages that enables the laborers to subsist and to perpetuate their race without either increase or diminution. The natural price of labor, therefore, depends on the price of the food, necessaries, and conveniences required for the support of the labor and his family. With a rise in the price of food and necessaries, the natural price of labor will rise; with the fall in their price, the natural price of labor will fall. The market price of labor is the market rate of wages that depends on the forces of demand for and supply of laborers as well as the price of commodities. The market price of labor deviates from its natural price, but eventually converges to the natural wage. High wages encourage population growth, which increases supply of labor and brings down wages, while low wages follow the opposite. The natural wage is not fixed but varies with time and place. When the growth requires more capital and labor, the price of labor will rise if capital accumulation is faster than labor growth; and if the deficiency of laborers were not supplied by more populous countries, this tendency would very much raise the price of labor. In the natural advance of society, the wages of labor will have a tendency to fall, as far as they are regulated by supply and demand; for the supply of laborers will continue to increase at the same rate, whilst demand for them will increase at a slower rate. If money be of an unvarying value, both rent and wages will have a tendency to rise with the progress of wealth and population. Regarding the poor laws, Ricardo believes that wages should be left to the fair and free competition of the market, and should never be controlled by the interference of the legislature. 183 Chapter VI. On Profits: The whole value of commodities is divided into the profits of stock, and the wages of labor. A rise in the price of corn, which increases the money wages of the laborer, diminishes the money value of the farmer s profits. In every case, agricultural and manufacturing profits are lowered by a rise in the price of raw produce, if it accompanied by a rise of wages. In all countries and all times, profits depend on the quantity of labor requisite to provide necessaries for the laborers on that land or with that capital which yields no rent. The effects of accumulation will depend chiefly on the fertility of the land. When the profits approach zero, no further capital will be supplied and population will stop to grow if no fund is available to sustain more laborers. If the prices of all commodities could be raised, still the effect on profits would be the same, and the value of the medium only in which prices and profits are estimated would be lowered. 184 Chapter VII. On Foreign Trade: Ricardo favors free trade on the principle of comparative advantage, which greatly contributes to the theory of international trade. He views that the rate of profits can never be increased but by a fall in wages, and that there can be no permanent fall of wages but in consequence of a fall of the necessaries on which wages are expended. Therefore, if by the extension of foreign trade, or by improvements in machinery, the food and necessaries of the labor can be brought to market, at a reduced price, profits will rise. In foreign trade, if a country purchases goods from abroad and sells at lower prices than domestically produced goods and if the wages fall as a result, profits will increase since profits vary only in response to change of wages in his system. Ricardo believes that free trade by specialization based on comparative advantage distributes labor most effectively and economically, which increases the general mass of productions and diffuses general benefits and binds together by common tie of interest and intercourse. Suppose that England needs 80 men-year to produce a certain quantity of cloth, and needs 100 men-year to produce that of wine, while Portugal needs 120 and 60 men-year correspondingly. If both countries consume the same quantities of both products, each country produces both products at the same time, 360 men-year is needed to produce all. When England is specialized in cloth and Portugal in wine, 280 men-year is needed to produce all. Specialization and exchanges between English cloth and Portuguese wine can save 80 men-year in production of both items, which is gains from trade in terms of labor without considering other costs. 185 Book IV. The French Revolution and the Industrial Revolution,

80 Ricardo views that a restored equilibrium in trade is parity of exchange rates by estimating the value of the currency of one country in the currency of another, but there is no standard by which this can be determined. When the Portuguese purchases English cloth, the English man receives a bill of exchange with Portuguese money, and tries to sell the bill in the foreign exchange market to get the English pound. If the profit margin of English producer by the market exchange rate is less than the cost (production, shipment, and exchange premium), the trade will stop immediately. On the other hand, Ricardo s Principles discusses several chapters on taxes, which give the idea for the foundation of public finance. Ricardo s labor theory of value, his elaboration of the division of incomes, and the function of wages, rent, and trade deeply influenced economic philosophies of Karl Marx, John Stuart Mill, Alfred Marshall, and many others. Malthus versus Ricardo: Owing to different backgrounds, Malthus supported the traditional landed estates, while Ricardo was sympathetic to freedom from government restrictions against capitalist enterprises. (i) On the Corn Laws: Malthus supported the Corn Laws to avoid increasing dependency on foreign goods, to encourage agricultural improvement, and to control expanding manufacturing with the cost of agriculture. Ricardo opposed the laws since tariffs on agricultural products ensured that less-productive domestic land would be harvested and rents would be driven up. Thus, profits would be directed toward landlords and away from the emerging industrial capitalists; landlords tended to squander their wealth on luxuries, rather than invest; so that the Corn Laws would lead the stagnation of the British economy. 186 (ii) On Rent: Malthus showed that rent will rise on the original fertile land since the price of the output will be the same no matter where produced, and the rate of profit throughout the economy will fall until it equals the rate of profit on the marginal land. Implicitly assuming that the demand for agricultural products was inelastic, Ricardo argued that technological changes would enable farmers to produce the same output from less land; thus the value of food would fall and lead to a rise in profits as the result of the reduction of rents. Since the free importation of grains would accomplish the same objective, he then asked why, if landlords wished to prohibit the importation of grain, should they not also ban all technological improvement, rather than urging technological change as Malthus had done. (iii) On Value: Malthus presented a demand-supply approach to value, rather than the labor theory with its cost of production analysis. Malthus contended that the labor theory was an oversimplification. He wrote to Ricardo: when you reject the consideration of demand and supply in the price of commodities and refer only to the means of supply, you appear to me to look only at the half of your subject. No wealth can exist unless the demand, or the estimation in which the commodity is held exceeds the cost of production; and with regard to a vast mass of commodities does not the demand actually determine the cost? How is the price of corn, and the quality of the last land taken into cultivation determined but by the state of the population and the demand. How is the price of metals determined? Ricardo replied: I do not dispute either the influence of demand on the price of corn and on the price of all other things, but supply follows close at its heels, and soon takes the power of regulating price in his own hands, and in regulating it he is determined by the cost of production. Ricardo was more interested in value, which depends on abundance, but on the obstacles to production; Malthus was concerned with abundance, and emphasized absolute prices, not relative values. (iv) Say s Law of Markets: Malthus believed that unrestrained capital investment would lead to overproduction and economic stagnation. Ricardo, on the contrary, argued that there was no inherent limitation on the ability of capital investment to promote economic growth until a stationary state was reached. Malthus simply argued that Say s Law was supportable as a general proposition, because there was no long-term tendency toward stagnation in a capitalist, competitive system. Ricardo believed that the situation, where both capital and labor were employed at the same time, would never happen Book IV. The French Revolution and the Industrial Revolution,

81 4. Other Intellectual Developments in the Eighteenth Century The intellectual advances were impeded by inertia, superstition, persecution, censorship, and ecclesiastical control of education. These obstacles were weaker than before, but they were still far stronger than in an industrial civilization where the competition of individuals, groups, and nations compels men to search for new ideas and ways, new means for old ends. Most men in the eighteenth century moved in a slowly changing milieu where traditional responses and ideas usually sufficed for the needs of life. When novel situations and events did not readily lend themselves to natural explanations, the common mind ascribed them to supernatural cause, and rested. (i) A thousand superstitions survived side by side with the rising enlightenment. Paris swarmed with magicians and other impostors who offered to ensure worldly success or eternal youth. The worst superstition of all, the belief in witchcraft, disappeared in this century, except for some local vestiges. Many Protestant states agreed with the Catholics on a necessity of persecution against Christianity. (ii) Censorship of speech and press was generally more relaxed in Protestant than in Catholic countries. However, the philosophes contrived a variety of ways to elude the censorship. They sent their manuscripts to foreign publishers, usually to Amsterdam, The Hague, or Geneva; thence their books, in French, were imported wholesale into France; almost every day forbidden books arrived by boat at Bordeaux or other points on the French coast or frontier. (iii) The control of education by the clergy was an obstacle to free thought. All Europe acclaimed the Jesuits as reachers of classical languages and literatures, but they were less helpful in science. The University of Paris was dominated by priests far more conservative than the Jesuits. Learned academies had sprung up in this century; learned journals stimulated the intellectual progress; and encyclopedias took form to gather, order, and transmit the new knowledge. 188 The growth of science of its pursuit, its methods, its findings, its successful predictions and productions, its power, and its prestige is the positive side of that basic modern development whose negative side is the decline of supernatural belief. Two priesthoods came into conflict: the one devoted to the holding of character through religion, the other to the education of the intellect through science. It is customary to rank the eighteenth century below the seventeenth in scientific achievements; and certainly there are no figures here that tower like Galileo or Newton, no accomplishments commensurate with the enlargement of the known universe or the cosmic extension of gravitation, or the formulation of calculus, or the discovery of the circulation of the blood. And yet, what a galaxy of stars brightens the scientific scene in the eighteenth century! Euler and Lagrange in mathematics, Herschel and Laplace in astronomy, d Alembert, Franklin, Galvani, and Volta in physics, Priestley and Lavoisier in chemistry, John Hunter in anatomy, Condillac in psychology, Jenner and Boerhaave in medicine. The multiplying academies gave more and more of their time and funds to scientific research. The universities increasing admitted science to their curriculums; between 1702 and 1750 Cambridge established chairs in anatomy, astronomy, botany, chemistry, geology, and experimental philosophy i.e. physics. Scientific method became more rigorously experimental. The nationalistic animosity that had tarnished the International of the Mind in the controversy between Newton and Leibniz subsided, and the new priesthood joined hands across frontiers, theologies, and wars to explore the expanding unknown. Recruits came from every class, from the impoverished Priestley and the foundling d Alembert to the titled Buffon and the millionaire Lavoisier. Kings and princes entered the quest: George III took up botany, John V astronomy, Louis XVI physics. Amateurs like Montesquieu and Voltaire, women like Mme. Du Chateler and the actress Mlle. Clairon labored and played in laboratories, and Jesuit scientists like Boscovich strove to unite the old faith and the new. Not till our won explosive times did science enjoy such popularity and honor. 189 Book IV. The French Revolution and the Industrial Revolution,

82 Photo IV-4-1. Ludwig van Beethoven ( ) Source: Photo IV-4-2. Frederick the Great ( ) Who founded a Prussian primary education system by a decree of Generallandschulreglement 190 Source: Book IV. The French Revolution and the Industrial Revolution,