Front Page Titles (by Subject) CHAPTER IX.: On Wages, Interest, and Rent. - Letters to Mr. Malthus, and A Catechism of Political Economy
The Online Library of Liberty
A project of Liberty Fund, Inc.
CHAPTER IX.: On Wages, Interest, and Rent. - Jean Baptiste Say, Letters to Mr. Malthus, and A Catechism of Political Economy 
Letters to Mr. Malthus, on Several Subjects of Political Economy, and on the Cause of the Stagnation of Commerce. To Which is added, A Catechism of Political Economy, or Familiar Conversations on the Manner in which Wealth is Produced, Distributed, and Consumed in Society, trans. John Richter (London: Sherwood, Neely, and Jones, 1821).
About Liberty Fund:
Liberty Fund, Inc. is a private, educational foundation established to encourage the study of the ideal of a society of free and responsible individuals.
The text is in the public domain.
Fair use statement:
This material is put online to further the educational goals of Liberty Fund, Inc. Unless otherwise stated in the Copyright Information section above, this material may be used freely for educational and academic purposes. It may not be used in any way for profit.
On Wages, Interest, and Rent.
What do you observe on the wages of workmen, interest of capital, and rent of land?
That he who lets out his industry, his capital, or his land, renounces the profits he might have drawn from their productive services; he renounces them in favour of an undertaker of industry, who hires them, and who draws, from these means of production, a profit which is either superior or equal, or inferior, to what he pays for them.
What causes raise the rate of wages?
The abundance of capital and land compared with the number of workmen: for there must be land, and, above all, capital, in order to employ workmen.
Why is it that wages scarcely ever exceed what is necessary to maintain a workman and his family, according to the custom of the place?
Because wages, by rising higher, encourage an increase of workmen; this occasions such services to be more offered in proportion to the demand for them. Works, which require rare and distinguished talents, are exceptions to this rule, because such talents cannot always be increased according to the demand for them.
What causes influence the rate of interest?
The interest of capital lent, although expressed by one price only, a certain per centage on the capital lent, ought really to be distinguished into two parts.
Explain that by an example.
If you lend a sum of money, and you agree with the borrower for an interest of six per cent. per annum, there is in this rate, four per cent. (more or less), to pay for the productive service of the capital, and two per cent. (more or less) to cover the risk that you run of never getting your capital back.
On what do you found this presumption?
On this, that if you were enabled to lend the same capital with perfect security, on a very safe mortgage, you would lend it at four per cent. more or less. The surplus is then a species of premium of insurance which is paid to you to indemnify you for the risk that you run.
Setting aside the premium of insurance, which varies according to the greater or less solidity of the parties, what are the causes which vary the rate of interest, properly so called?
The rate of interest rises when those who borrow have numerous, ready, and lucrative employments for capital, because then many undertakers of industry are desirous of participating in the profits which these employments of capital offer; and capitalists are also more likely to use them themselves, which augments the demand for capital, and diminishes the amount which is offered for employment. The rate of interest increases also when, from whatever cause, the mass of disposable capital, that is, of capitals requiring to be employed, has been diminished.* Contrary circumstances lower the rate of interest; and one of these circumstances may so balance the other, that the rate of interest will remain at the same point, because the one tends to heighten, precisely as much as the other to lower, the rate.
When you say that the mass of disposable capital increases or diminishes, do you mean by that the quantity of money?
By no means: I mean values destined by their possessors to reproductive consumption, and which are not so engaged that they cannot be withdrawn in order to use them differently.
Explain that by an example?
Suppose that you have lent funds to a merchant on condition of his paying them back to you on giving him three months notice; or, which comes to the same thing, that you are in the habit of discounting bills of exchange, can you not easily employ these funds in a different way if you find any one more convenient to you?
Then these funds are a disposable capital. They are so too, if they are in the form of a merchandise easily sold, since you can exchange them readily for any other value. They are still more disposable if they are in specie; but you must understand that the sum of all these disposable capitals is a very different thing from the sum of coined money, and that it may be much more considerable.
I understand so.
Well! it is the sum of these capitals which influences the rate of interest, and not the sums of money under which form these values temporarily present themselves when they are about to pass from one hand to another. A disposable capital may be in the form of a certain sort of merchandise, a sack of guineas for instance: but if the quantity of this merchandise which is in circulation, has no influence on the rate of interest, the abundance or the scarcity of the gold has no influence on it either.
It is not then really the hire of money that one pays when one pays an interest?
By no means.
Why is it called the interest of money?
From very inaccurate ideas which are formed of the nature and use of capital.
What is legal interest?
It is the rate fixed by the law in cases where it has not been fixed by the parties: as when the holder of a capital has enjoyed it in the place of an absentee, or a minor to whom he is bound to account.
Cannot public authority fix a limit to the interest which individuals may agree upon?
It cannot, without violating the freedom of transactions.
What causes influence the rent of land?
The demand for the hire of farms compared with the number to be let. It may be observed on this subject, that the demand commonly exceeds the number to be let, because in all countries the number of these is necessarily limited; while that of farmers and of capitals, which may be applied to this industry, are not necessarily so: so that in those places, where there are not stronger motives to a contrary effect, rent is rather above than below the real profit of land.
What have you more to say on this subject?
That rent tends nevertheless to get down to the profit of land; for when it exceeds it, the farmer is obliged to pay the excess, either out of the profits of his industry, or the interest of his capital; and is no longer completely indemnified for the employment of those means of production.
[* ]See some striking examples in my Treatise on Political Economy, liv. ii. chap. 8.