Principles of Political Economy · John Stuart Mill
INTRODUCTORY.
A Sketch Of The History Of Political Economy. GENERAL BIBLIOGRAPHY.—There is no satisfactory general history of political economy in English. Blanqui’s “Histoire de l’économie politique en Europe” (Paris, 1837) is disproportioned and superficial, and he labors under the disadvantage of not understanding the English school of economists. He studies to give the history of economic facts, rather than of economic laws. The book has been translated into English (New York, 1880). Villeneuve-Bargemont, in his “Histoire de l’économie politique” (Paris, 1841), aims to oppose a “Christian political economy” to the “English” political economy, and indulges in religious discussions. Travers Twiss, “View of the Progress of Political Economy in Europe since the Sixteenth Century” (London, 1847), marked an advance by treating the subject in the last four centuries, and by separating the history of principles from the history of facts. It is brief, and only a sketch. Julius Kautz has published in German the best existing history, “Die geschichtliche Entwickelung der National-Oekonomie und ihrer Literatur” (Vienna, 1860). (See Cossa, “Guide to the Study of Political Economy,” page 80.) Cossa in his book has furnished a vast amount of information about writers, classified by epochs and countries, and a valuable discussion of the divisions of political economy by various writers, and its relation to other sciences. It is a very desirable little hand-book. McCulloch, in his “Introduction to the Wealth of Nations,” gives a brief sketch of the growth of economic doctrine. The editor begs to acknowledge his great indebtedness for information to his colleague, Professor Charles F. Dunbar, of Harvard University.
Systematic study for an understanding of the laws of political economy is to be found no farther back than the sixteenth century. The history of political economy is not the history of economic institutions, any more than the history of mathematics is the history of every object possessing length, breadth, and thickness. Economic history is the story of the gradual evolution in the thought of men of an understanding of the laws which to-day constitute the science we are studying. It is essentially modern.(1) Aristotle(2) and Xenophon had some comprehension of the theory of money, and Plato(3) had defined its functions with some accuracy. The economic laws of the Romans were all summed up in the idea of enriching the metropolis at the expense of the dependencies. During the middle ages no systematic study was undertaken, and the nature of economic laws was not even suspected.
It is worth notice that the first glimmerings of political economy came to be seen through the discussions on money, and the extraordinary movements of gold and silver. About the time of Charles V, the young study was born, accompanied by the revival of learning, the Reformation, the discovery of America, and the great fall in the value of gold and silver. Modern society was just beginning, and had already brought manufactures into existence—woolens in England, silks in France, Genoa, and Florence; Venice had become the great commercial city of the world; the Hanseatic League was carrying goods from the Mediterranean to the Baltic; and the Jews of Lombardy had by that time brought into use the bill of exchange. While the supply of the precious metals had been tolerably constant hitherto, the steady increase of business brought about a fall of prices. From the middle of the fourteenth to the end of the fifteenth century the purchasing power of money increased in the ratio of four to ten. Then into this situation came the great influx of gold and silver from the New World. Prices rose unequally; the trading and manufacturing classes were flourishing, while others were depressed. In the sixteenth century the price of wheat tripled, but wages only doubled; the laboring-classes of England deteriorated, while others were enriched, producing profound social changes and the well-known flood of pauperism, together with the rise of the mercantile classes. Then new channels of trade were opened to the East and West. Of course, men saw but dimly the operation of these economic causes; although the books now began to hint at the right understanding of the movements and the true laws of money.
Even before this time, however, Nicole Orêsme, Bishop of Lisieux (died 1382), had written intelligently on money;(4) but, about 1526, the astronomer Copernicus gave a very good exposition of some of the functions of money. But he, as well as Latimer,(5) while noticing the economic changes, gave no correct explanation. The Seigneur de Malestroit, a councilor of the King of France, however, by his errors drew out Jean Bodin(6) to say that the rise of prices was due to the abundance of money brought from America. But he was in advance of his time, as well as William Stafford,(7) the author of the first English treatise on money, which showed a perfect insight into the subject. Stafford distinctly grasped the idea that the high prices brought no loss to merchants, great gain to those who held long leases, and loss to those who did not buy and sell; that, in reality, commodities were exchanged when money was passed from hand to hand.
Such was the situation(8) which prefaced the first general system destined to be based on supposed economic considerations, wrongly understood, to be sure, but vigorously carried out. I refer to the well-known mercantile system which over-spread Europe.(9) Spain, as the first receiver of American gold and silver, attributed to it abnormal power, and by heavy duties and prohibitions tried to keep the precious metals to herself. This led to a general belief in the tenets of the mercantile system, and its adoption by all Europe. 1. It was maintained that, where gold and silver abounded, there would be found no lack of the necessaries of life; 2. Therefore governments should do all in their power to secure an abundance of money. Noting that commerce and political power seemed to be in the hands of the states having the greatest quantity of money, men wished mainly to create such a relation of exports and imports of goods as would bring about an importation of money. The natural sequence of this was, the policy of creating a favorable “balance of trade” by increasing exports and diminishing imports, thus implying that the gain in international trade was not a mutual one. The error consisted in supposing that a nation could sell without buying, and in overlooking the instrumental character of money. The errors even went so far as to create prohibitory legislation, in the hope of shutting out imported goods and keeping the precious metals at home. The system spread over Europe, so that France (1544) and England (1552) forbade the export of specie. But, with the more peaceful conditions at the end of the sixteenth century, the expansion of commerce, the value of money became steadier, and prices advanced more slowly.
Italian writers were among the first to discuss the laws of money intelligently,(10) but a number of acute Englishmen enriched the literature of the subject,(11) and it may be said that any modern study of political economy received its first definite impulse from England and France. The prohibition of the export of coin was embarrassing to the East India Company and to merchants; and Mun tried to show that freedom of exportation would increase the amount of gold and silver in a country, since the profits in foreign trade would bring back more than went out. It probably was not clear to them, however, that the export of bullion to the East was advantageous, because the commodities brought back in return were more valuable in England than the precious metals. The purpose of the mercantilists was to increase the amount of gold and silver in the country. Mun, with some penetration, had even pointed out that too much money was an evil; but in 1663 the English Parliament removed the restriction on the exportation of coin. The balance-of-trade heresy, that exports should always exceed imports (as if merchants would send out goods which, when paid for in commodities, should be returned in a form of less value than those sent out!), was the outcome of the mercantile system, and it has continued in the minds of many men to this day. The policy which aimed at securing a favorable balance of trade, and the plan of protecting home industries, had the same origin. If all consumable goods were produced at home, and none imported, that would increase exports, and bring more gold and silver into the country. As all the countries of Europe had adopted the mercantile theory after 1664, retaliatory and prohibitory tariffs were set up against each other by England, France, Holland, and Germany. Then, because it was seen that large sums were paid for carrying goods, in order that no coin should be required to pay foreigners in any branch of industry, navigation laws were enacted, which required goods to be imported only in ships belonging to the importing nation. These remnants of the mercantile system continue to this day in the shipping laws of this and other countries.(12)
A natural consequence of the navigation acts, and of the mercantile system, was the so-called colonial policy, by which the colonies were excluded from all trade except with the mother-country. A plantation like New England, which produced commodities in competition with England, was looked upon with disfavor for her enterprise; and all this because of the fallacy, at the foundation of the mercantile system, that the gain in international trade is not mutual, but that what one country gains another must lose.(13) An exposition of mercantilism would not be complete without a statement of the form it assumed in France under the guidance of Colbert,(14) the great minister of Louis XIV, from 1661 to 1683. In order to create a favorable balance of trade, he devoted himself to fostering home productions, by attempts to abolish vexatious tolls and customs within the country, and by an extraordinary system of supervision in manufacturing establishments (which has been the stimulus to paternal government from which France has never since been able to free herself). Processes were borrowed from England, Germany, and Sweden, and new establishments for making tapestries and silk goods sprang up; even the sizes of fabrics were regulated by Colbert, and looms unsuitable for these sizes destroyed. In 1671 wool-dyers were given a code of detailed instructions as to the processes and materials that might be used. Long after, French industry felt the difficulty of struggling with stereotyped processes. His system, however, naturally resulted in a series of tariff measures (in 1664 and 1667). Moderate duties on the exportation of raw materials were first laid on, followed by heavy customs imposed on the importation of foreign goods. The shipment of coin was forbidden; but Colbert’s criterion of prosperity was the favorable balance of trade. French agriculture was overlooked. The tariff of 1667 was based on the theory that foreigners must of necessity buy French wines, lace, and wheat; that the French could sell, but not buy; but the act of 1667 cut off the demand for French goods, and Portuguese wines came into the market. England and Holland retaliated and shut off the foreign markets from France. The wine and wheat growers of the latter country were ruined, and the rural population came to the verge of starvation. Colbert’s last years were full of misfortune and disappointment; and a new illustration was given of the fallacy that the gain from international trade was not mutual.
From this time, economic principles began to be better apprehended. It is to be noted that the first just observations arose from discussions upon money, and thence upon international trade. So far England has furnished the most acute writers: now France became the scene of a new movement. Marshal Vauban,(15) the great soldier, and Boisguillebert(16) both began to emphasize the truth that wealth really consists, not in money alone, but in an abundance of commodities; that countries which have plenty of gold and silver are not wealthier than others, and that money is only a medium of exchange. It was not, however, until 1750 that evidences of any real advance began to appear; for Law’s famous scheme (1716-1720) only served as a drag upon the growth of economic truth. But in the middle of the eighteenth century an intellectual revival set in: the “Encyclopædia” was published, Montesquieu wrote his “l’Ésprit des Lois,” Rousseau was beginning to write, and Voltaire was at the height of his power. In this movement political economy had an important share, and there resulted the first school of Economists, termed the Physiocrats.
The founder and leader of this new body of economic thinkers was François Quesnay,(17) a physician and favorite at the court of Louis XV. Passing by his ethical basis of a natural order of society, and natural rights of man, his main doctrine, in brief, was that the cultivation of the soil was the only source of wealth; that labor in other industries was sterile; and that freedom of trade was a necessary condition of healthy distribution. While known as the “Economists,” they were also called the “Physiocrats,”(18) or the “Agricultural School.” Quesnay and his followers distinguished between the creation of wealth (which could only come from the soil) and the union of these materials, once created, by labor in other occupations. In the latter case the laborer did not, in their theory, produce wealth. A natural consequence of this view appeared in a rule of taxation, by which all the burdens of state expenditure were laid upon the landed proprietors alone, since they alone received a surplus of wealth (the famous _net produit_) above their sustenance and expenses of production. This position, of course, did not recognize the old mercantile theory that foreign commerce enriched a nation solely by increasing the quantity of money. To a physiocrat the wealth of a community was increased not by money, but by an abundant produce from its own soil. In fact, Quesnay argued that the right of property included the right to dispose of it freely at home or abroad, unrestricted by the state. This doctrine was formulated in the familiar expression, “_Laissez faire, laissez passer_.”(19) Condorcet and Condillac favored the new ideas. The “Economists” became the fashion in France; and even included in their number Joseph II of Austria, the Kings of Spain, Poland, Sweden, Naples, Catharine of Russia, and the Margrave of Baden.(20) Agriculture, therefore, received a great stimulus.
Quesnay had many vigorous supporters, of whom the most conspicuous was the Marquis de Mirabeau(21) (father of him of the Revolution), and the culmination of their popularity was reached about 1764. A feeling that the true increase of wealth was not in a mere increase of money, but in the products of the soil, led them naturally into a reaction against mercantilism, but also made them dogmatic and overbearing in their one-sided system, which did not recognize that labor in all industries created wealth. As the mercantile system found a great minister in Colbert to carry those opinions into effect on a national scale, so the Physiocrats found in Turgot(22) a minister, under Louis XVI, who gave them a national field in which to try the doctrines of the new school. Benevolently devoted to bettering the condition of the people while Intendant of Limoges (1751), he was made comptroller-general of the finances by Louis XVI in 1774. Turgot had the ability to separate political economy from politics, law, and ethics. His system of freeing industry from governmental interference resulted in abolishing many abuses, securing a freer movement of grain, and in lightening the taxation. But the rigidity of national prejudices was too strong to allow him success. He had little tact, and raised many difficulties in his way. The proposal to abolish the _corvées_ (compulsory repair of roads by the peasants), and substitute a tax on land, brought his king into a costly struggle (1776), and attempts to undermine Turgot’s power were successful. With his downfall ended the influence of the Economists. The last of them was Dupont de Nemours,(23) who saw a temporary popularity of the Physiocrats in the early years of the French Revolution, when the Constituent Assembly threw the burden of taxes on land. But the fire blazed up fitfully for a moment, only to die away entirely.
All this, however, was the slow preparation for a newer and greater movement in political economy than had yet been known, and which laid the foundation of the modern study as it exists to-day. The previous discussions on money and the prominence given to agriculture and economic considerations by the Economists made possible the great achievements of Adam Smith and the English school. A reaction in England against the mercantile system produced a complete revolution in political economy. Vigorous protests against mercantilism had appeared long before,(24) and the true functions of money had come to be rightly understood.(25) More than that, many of the most important doctrines had been either discussed, or been given to the public in print. It is at least certain that hints of much that made so astonishing an effect in Adam Smith’s “Wealth of Nations” (1776) had been given to the world before the latter was written. To what sources, among the minor writers, he was most indebted, it is hard to say. Two, at least, deserve considerable attention, David Hume and Richard Cantillon.
The former published his “Economic Essays” in 1752, which contained what even now would be considered enlightened views on money, interest, balance of trade, commerce, and taxation; and a personal friendship existed between Hume and Adam Smith dating back as far as 1748, when the latter was lecturing in Edinburgh on rhetoric. The extent of Cantillon’s acquirements and Adam Smith’s possible indebtedness to him have been but lately recognized. In a recent study(26) on Cantillon, the late Professor Jevons has pointed out that the former anticipated many of the doctrines later ascribed to Adam Smith, Malthus, and Ricardo. Certain it is that the author of the “Wealth of Nations” took the truth wherever he found it, received substantial suggestions from various sources, but, after having devoted himself in a peculiarly successful way to collecting facts, he wrought out of all he had gathered the first rounded system of political economy the world had yet known; which pointed out that labor was at the basis of production, not merely in agriculture, as the French school would have it, but in all industries; and which battered down all the defenses of the mediæval mercantile system. In a marked degree Adam Smith(27) combined a logical precision and a power of generalizing results out of confused data with a practical and intuitive regard for facts which are absolutely necessary for great achievements in the science of political economy. At Glasgow (1751-1764) Adam Smith gave lectures on natural theology, ethical philosophy, jurisprudence, and political economy, believing that these subjects were complementary to each other.
A connected and comprehensive grasp of principles was the great achievement of Adam Smith;(28) for, although the “Wealth of Nations” was naturally not without faults, it has been the basis of all subsequent discussion and advance in political economy. In Books I and II his own system is elucidated, while Book IV contains his discussion of the Agricultural School and the attacks on the mercantile system. Seeing distinctly that labor was the basis of all production (not merely in agriculture), he shows (Books I and II) that the wealth of a country depends on the skill with which its labor is applied, and upon the proportion of productive to unproductive laborers. The gains from division of labor are explained, and money appears as a necessary instrument after society has reached such a division. He is then led to discuss prices (market price) and value; and, since from the price a distribution takes place among the factors of production, he is brought to wages, profit, and rent. The functions of capital are explained in general; the separation of fixed from circulating capital is made; and he discusses the influence of capital on the distribution of productive and unproductive labor; the accumulation of capital, money, paper money, and interest. He, therefore, gets a connected set of ideas on production, distribution, and exchange. On questions of production not much advance has been made since his day; and his rules of taxation are now classic. He attacked vigorously the balance-of-trade theory, and the unnatural diversion of industry in England by prohibitions, bounties, and the arbitrary colonial system. In brief, he held that a plan for the regulation of industry by the Government was indefensible, and that to direct private persons how to employ their capital was either hurtful or useless. He taught that a country will be more prosperous if its neighbors are prosperous, and that nations have no interest in injuring each other. It was, however, but human that his work should have been somewhat defective.(29) A new period in the history of political economy, however, begins with Adam Smith. As Roscher says, he stands in the center of economic history.
New writers now appear who add gradually stone after stone to the good foundation already laid, and raise the edifice to fairer proportions. The first considerable addition comes from a contribution by a country clergyman, Thomas Robert Malthus,(30) in his “Essay on the Principles of Population” (1798). Against the view of Pitt that “the man who had a large family was a benefactor to his country,” Malthus argued conclusively that “a perfectly happy and virtuous community, by physical law, is constrained to increase very rapidly.... By nature human food increases in a slow arithmetical ratio; man himself increases in a quick geometrical ratio, unless want and vice stop him.” In his second edition (1803), besides the positive check of vice and want, he gave more importance to the negative check of “self-restraint, moral and prudential.” The whole theory was crudely stated at first; and it raised the cry that such a doctrine was inconsistent with the belief in a benevolent Creator. In its essence, the law of population is simply that a tendency and ability exist in mankind to increase its numbers faster than subsistence, and that this result actually will happen unless checks retard it, or new means of getting subsistence arise.
If an undue increase of population led to vice and misery, in Malthus’s theory, he certainly is not to be charged with unchristian feelings if he urged a self-restraint by which that evil result should be avoided. Malthus’s doctrines excited great discussion: Godwin says that by 1820 thirty or forty answers to the essay had been written; and they have continued to appear. The chief contributions have been by A. H. Everett, “New Ideas on Population” (1823), who believed that an increase of numbers increased productive power; by M. T. Sadler, “Law of Population” (1830), who taught that human fertility varied inversely with numbers, falling off with density of population; by Sir Archibald Alison, “Principles of Population” (1840), who reasoned inductively that the material improvement of the human race is a proof that man can produce more than he consumes, or that in the progress of society preventive checks necessarily arise; by W. R. Greg, “Enigmas of Life” (1873); and by Herbert Spencer, “Westminster Review” (April, 1852), and “Principles of Biology,” (part vi, ch. xii and xiii), who worked out a physiological check, in that with a mental development out of lower stages there comes an increased demand upon the nervous energy which causes a diminution of fertility. Since Darwin’s studies it has been very generally admitted that it is the innate _tendency_ of all organic life to increase until numbers press upon the limit of food-production; not that population has always done so in every country.(31) Malthus’s teachings resulted in the modern poor-house system, beginning with 1834 in England, and they corrected some of the abuses of indiscriminate charity.
While Adam Smith had formulated very correctly the laws of production, in his way Malthus was adding to the means by which a better knowledge of the principles of distribution was to be obtained; and the next advance, owing to the sharp discussions of the time on the corn laws, was, by a natural progress, to the law of diminishing returns and rent. An independent discovery of the law of rent is to be assigned to no less than four persons,(32) but for the full perception of its truth and its connection with other principles of political economy the credit has been rightly given to David Ricardo,(33) next to Adam Smith without question the greatest economist of the English school. Curiously enough, although Adam Smith was immersed in abstract speculations, his “homely sagacity” led him to the most practical results; but while Ricardo was an experienced and successful man of business, he it was, above all others, who established the abstract political economy, in the sense of a body of scientific laws to which concrete phenomena, in spite of temporary inconsistencies, must in the end conform. His work, therefore, supplemented that of Adam Smith; and there are very few doctrines fully worked out to-day of which hints have not been found in Ricardo’s wonderfully compact statements. With no graces of exposition, his writings seem dry, but are notwithstanding mines of valuable suggestions.
Text from Project Gutenberg, public domain in the United States.