The Online Library of Liberty

A project of Liberty Fund, Inc.

• Preface.
• Lecture I.
• Lecture II.
• Lecture III.
• Lecture IV.
• Lecture V.
• Lecture VI.
• Lecture VII.
• Lecture VIII.
• Lecture IX.
• Lecture X.
• Lecture XI.
• Appendix.
• Note On Page 32.
• Page 37.
• Page 39.
• Page 57.
• Page 65.
• Page 133.
• Page 145.
• Page 149.
• Page 164.
• Page 175.
• Page 183.
• Page 203.
• Page 223.

LECTURE IX.

Gentlemen,—

The theory of rent which I endeavoured to explain in a preceding lecture, has been made the foundation of a most ingenious theory of profits. It supposes, and correctly, that as population advances, there arises a necessity of resorting to inferior soils for the requisite supply of provisions, or of forcing the soils already in cultivation to yield a more abundant produce. In either case, labour and capital become less productive. The same amount of labour and capital is employed to raise a less quantity of corn. That this must be the case, when inferior soils are resorted to, is evident, the inferiority of the soils consisting in this, that to the same expense of cultivation they yield a less return, or at least that their produce does not bear so high a proportion to the expense of cultivation as in the case of better land. The same consequence follows when the additional supply, or any part of it, is forced from the land already cultivated; it being a property of all lands to yield each additional supply required from it, at a more than proportionally increased expense. Agricultural improvements have a contrary tendency; they diminish the cost of production, and thereby render the labour and capital employed in farming, more productive. This effect of improvements is sometimes less than, sometimes equal to, and sometimes greater than, the opposite effect produced by the increase of population, and accordingly the productive powers of agricultural labour sometimes diminish, sometimes remain stationary, and sometimes increase, as the society advances in population. On the whole, however, it is generally supposed that the march of population is more certain and constant than that of improvement, and must outstrip it in the long run, and therefore that there must be a constant tendency to decrease in the productive powers of agricultural labour. Whether this tendency is counteracted wholly or partially, it leaves undisturbed the theory of rent, which rests upon this principle, that if a less abundant supply of corn were required, it could be produced at a less proportional expense than the actual present supply; or that if a larger quantity were acquired, that addition could only be produced at a greater proportional expense. From these principles, it evidently follows that some corn is raised with a less cost of production, exclusive of the rent, than other portions are; but all corn of the same quality will have the same natural and average price, viz. such a price as may be sufficient to remunerate the grower of that quantity which, in order to satisfy the wants of the society, must be raised under the most naturally disadvantageous circumstances. But the corn which is raised with less expense, under more favourable circumstances, being sold at the same price, will leave an excess of profit to the grower of it. This excess, originating not in the superior skill of the farmer, but in the superior advantages of his farm, will necessarily be required and paid as rent. Thus rent equalizes the profits upon all farms, since whatever advantage one farm, from its fertility or situation, may have over another, is demanded by the landlord as rent.

But it is alleged, and I think without sufficient reason, that rent exercises a considerable influence over profits, and some of the most distinguished writers have adopted the theory, first, I believe, proposed and explained by the late Sir Edward West, which considers profits to be almost entirely regulated by the fertility of the last and worst soil that is brought under cultivation. Mr. M‘Culloch, in his “Principles of Political-Economy,” page 486, lays down the doctrine in the following words, which he prints in italics:—“The decreasing fertility of the soil is therefore, at bottom, the great and only necessary cause of a fall of profits.” The theory is an ingenious one, and I should feel much pleasure in assenting to it, and it is with corresponding regret that I have come to the very contrary conclusion, namely, that the decreasing fertility of the soil has scarcely any direct effect upon the rate of profits, and that it exercises only a remote influence, if any, by its effect in retarding the increase of population.

The proof usually given of the theory to which I have alluded, may be thus briefly stated. When inferior lands are taken into cultivation to satisfy the increasing wants of the society, the same amount of labour and fixed capital produces a less return than before; but this diminution will not, and cannot, entirely fall upon the wages of labour, since the labourer could not support himself and family if it took place; some part of it must therefore fall upon the profits of agricultural capital, and since the profits of capital employed in different trades will preserve their usual level, this permanent depression of the profits of agriculture must be accompanied by a corresponding permanent reduction of profits in all other trades; and thus as society advances in population, and is compelled to resort for subsistence to corn raised at an increased expense of capital and labour, the profits of every trade must, at the same time, decline.

The supporters of this system universally, I believe, maintain, that the increase of capital in any country, unaccompanied by an increase of population, has not even any tendency to reduce the profits of capital, since they say that the last capital employed in any manufacture will necessarily be as productive as the first, and probably more so; and they exemplify it by saying, that if a thousand hats were required, the last would not be made at a greater cost of production than the first, and so on for any greater number.

Before I proceed to give what I consider a more accurate system of profits, and of the causes which determine their amount, and produce their rise or fall, I shall briefly point out the fallacies in the two arguments of which I have just given you a sketch. In the argument used to prove that the decreasing fertility of the soil is the great and necessary cause of a decline of profits, it is, I conceive, unwarrantably assumed, that the effect cannot be entirely borne by the labourer, and that therefore of necessity some part of it must fall upon capital. This necessity I cannot perceive. As population was advancing, the wages of labour must have been more than what would be necessary to the subsistence of the labourers, with such families as would keep up an unvarying population; they may sustain some reduction, and why not the entire amount of the reduction that has taken place in the returns made to labour and capital? It should be remembered that these diminutions in the returns to capital and labour proceed by imperceptibly small differences, and not by sudden steps, and that as long as population increases, the labourer may sustain some reduction in his wages. And even if the labourer cannot bear the entire reduction, and continue to support himself and his family as usual out of the diminished wages, what is it that determines how large a portion of the reduction shall be borne by him, and how much, from his inability to bear the whole, will be thrown upon the capitalist? To say merely that part must be borne by the labourer, and the rest by the capitalist, is a very loose way of regulating a matter which must be settled by contract. Even on the principle against which I am contending, I see no way of determining how much of the diminution the labourer can bear, except by leaving him such wages only as shall be sufficient for his subsistence, and that of such a family, on an average, as shall sustain a merely stationary population. This cause, therefore, of a reduction of profits, can only operate at the period when population ceases to increase. But I do not say that it is expedient that the wages of his labour should be thus reduced, but merely that while population is increasing, he cannot occasion a fall in profits by his inability to bear a reduction of wages. The matter is left open to contract, where the only circumstance which increases or causes the rate of wages is the competition of the employers, and this will not be increased by an increase in the number of labourers, unaccompanied by an increase of capital.

In the argument used to prove that the increase of capital has no tendency to diminish the rate of profits, the fallacy, I conceive, lies in the assumption, that without an increase of population an increased supply of any article can find purchasers without a reduction of price, and that therefore the additional capital can be employed in the same manner, and with the same rate of profits, as the old capital was before such addition took place. This I think is not true, but it is enough to say that it has never been attempted to be proved.

But I shall content myself with those allusions to the fallacies contained in those arguments, since the most satisfactory refutation of any error is the proof of the opposing truths; and for my purpose, it is enough if you will grant me your attention for a few moments, without rejecting any proposition merely because it is inconsistent with the theory to which I have just alluded. I think that were it not for the progress of improvements and discoveries in the arts, and the increase of population, the rate of profits would continually decline, as the quantity of capital accumulated in the country increased.

Capital is useful, by advancing to the workman the value of his labour, before the produce of his labour is sold to the consumer. It also assists the labourer materially, by supplying him with instruments, tools, and machinery. These, which I may call by one general name, machines, are of various degrees of efficiency. By their help the labourer can execute more work than he could possibly do without their assistance. Some make his labour twice, some four times, and some ten times as efficient. It is however evident that the owner of a machine which gives assistance in this manner to the labourer, will be paid for the use of it in proportion to its value, and the injury it receives from use, and the time during which it is lent, and not in proportion to its effect in increasing the efficiency of labour. This is an immediate consequence of the principle of competition, which produces an equality between all the advantages and disadvantages of the different modes of employing capital. If the owner of one machine could obtain more for its use than the owner of another of equal value and durability, people would purchase, and artificers would then make the former rather than the latter, until the profits of each were reduced to their level. This level must be determined by the less efficient machine, since the sum paid for its use can never exceed the value of the assistance it gives the labourer. Thus, if with the aid of any instrument a labourer could execute exactly twice the quantity of work which he could perform without its assistance, then its use cannot be worth more than half the value of the work which the labourer performs with its assistance, that is, equal to the wages of the labourer during the same time. If more were demanded, the labourer would find it more advantageous to forego its assistance, and the employer would have the same quantity of work performed more cheaply by two labourers unassisted, than by one with the machine. Thus the sum which can be paid for the use of any machine has its greatest limit determined by its efficiency in assisting the operations of the labourer, while its lesser limit is determined by the efficiency of that capital which without imprudence is employed in the least efficient manner; and these principles are not altered, whether the use of the machine is paid for in the first instance by the labourer, or his employer, or whether they make or purchase the machine, and reimburse themselves by its profits for the labour or expense it costs them. The profits of capital employed in every industrial undertaking must find their level, and the height of that level must be determined by the profits of that capital which is naturally the least efficiently employed.

In order to consider more accurately the manner in which different portions of capital are employed, with different degrees of efficiency, in assisting labour, and rendering it more productive, I shall make the supposition of a society, which for simplicity I shall suppose perfectly destitute of capital at the commencement, but possessed of all the skill and information which exist among the inhabitants of these countries at the present day. Capital operates in rendering labour more productive, principally by these means—1st. By assisting the labourer with suitable machinery, including under this term all instruments, from the rudest and simplest tool, to the most exquisite and complicated machine. 2ndly. By advancing to the labourer the means of his subsistence, or the value of his labour during the progress of his work, and thus enabling him to remain steadily at his work, disengaged from the necessity of producing his own subsistence. Without capital applied in this manner, and belonging either to the labourer or his employer, little progress could be made: every man would be constantly occupied in producing the means of his own subsistence, and it is evident that little, if any, machinery could be produced, as the labourer is not supposed to have provisions to maintain himself while making such instruments. This application of capital to the support of the labourer, until his work has arrived at maturity and is fit for consumption, is therefore prior to the former, which consists in the introduction of machinery. They both agree in this, that by means of capital properly employed, labour, at the end of a certain period, will have produced goods of more value and utility than it could have done if it had been set directly to the production of such goods, without deriving any assistance from capital.

It is not easy to conceive by what slow steps the first accumulations of capital must have been made. Capital appears entirely the product of labour and previous capital. All, even the simplest kind of machinery, is itself produced by labour and machinery; that labour itself requiring to be supported by provisions already accumulated; that is, in other words, by capital. The matter appears to go in a circle, capital being alike the offspring and the parent of capital. Imagine a number of intelligent and industrious men, placed in a fertile country, in full possession of all the gifts of nature, but utterly destitute of capital. With what difficulty would they eke out a miserable subsistence, possessing no tools except what they could fashion with their hands, and teeth, and nails. It is probable that they would quickly relapse into barbarism. But if undaunted perseverance and industry should rescue them from such a fate, they would have immense difficulties to encounter, and their first progress in wealth would indeed be slow. If, however, any succeeded in procuring something beyond the means of his present support, and that some should do so is necessary, on the supposition of any progress in wealth taking place, he would then be able to command a certain quantity of the labour of other people, by offering them in exchange for it as much of the means of subsistence as they could have procured by employing it for themselves. This capitalist must then make it his business to endeavour to make that quantity of labour which he can command as efficacious as possible. This will probably be effected by employing part of his capital in paying labourers for making tools, and part of it in paying labourers who use those tools when made. Those tools must of course be such as, in proportion to the cost of production, or labour expended in their fabrication, will be most efficacious in increasing the productive powers of labour. Suppose those tools to be spades, or any other instruments of agricultural or manufacturing labour. As soon as one is made, he may put this first machine into the hands of the ablest labourer he can find, paying him as wages, so much as, without the aid of such an instrument, he could earn for himself. The profits which the capitalist or owner of this instrument will reap, will be the difference between the quantity of work which the labourer can do with and without its assistance. But as the number of such instruments increases in the hands of the same or different capitalists, other and inferior labourers must be employed to use them, and according to the principle which I have already laid down, the rate of profits must be determined by those cases in which the efficiency of capital is the least; that is, on the supposition I have just made, the profits of a single tool will be equal to the difference of the quantities of work which the feeblest labourer could execute with and without its use. It cannot be more, for then the labourer could earn more by declining its assistance; and it ought not to be less, for as there are not supposed to be instruments enough for all, the competition of labourers will compel the inferior labourers to accept such wages as will leave this profit to the capitalist, as the latter will have the choice among several labourers equally good, some of whom must necessarily work without any capital. But as the quantity of capital increases within the country, other causes will come into operation to diminish the profits of this kind of instrument: as soon as a sufficient number of those instruments is in existence to satisfy the wants of the society with the goods produced by their means, more cannot be employed with equal effect, since their products in such cases could not continue to be sold at the usual prices: and the owners of capital now becoming more plentiful, must sustain a reduction of profits, either by employing more in the usual manner, and selling their goods at reduced prices, or by furnishing their labourers with tools, which, though more effective than those hitherto used, are expensive in a still greater proportion, or by giving it altogether a different direction, and making other instruments to assist labour of some other kind. But in every case the profits of capital will be regulated by that portion of it which is obliged to be employed with the least efficiency in assisting labour, since none will be diverted to this employment as long as the owner thereof can derive a greater profit by giving it any other direction.

This extends to the profits of capital that principle of an equality between the supply and the effectual demand which in all cases regulates value. The price is always equal to that sum which is compatible with the entire supply being disposed of. Much more than this it never can be, since on this supposition a part of the supply would remain unsold, the proprietors of which, to avoid the loss consequent upon having a useless stock of articles left on their hands, will reduce their prices, and by competition, diminish the price of the article elsewhere. Neither can it be much less, since the possessors of goods will not readily sell them for a less price than they can get. But from the very meaning of the terms, it is manifest that all can get that price which produces an equality between the supply and the effectual demand. In the case of capital and profits, this equality between the supply and the effective demand is produced by such a rate of profit as is equal to the assistance which is given to labour by that portion of capital which is employed with the least efficiency, which I shall call the last portion of capital brought into operation: and for the reasons already mentioned, the rate of profits cannot be much higher or lower than this. This subject may perhaps be made clearer, if we pursue a little farther the analogy between the price of goods and the profits of capital. In each alike we may remark, that there generally exists among some an intensity of demand, which however exercises no influence upon price or profits. The intensity of the demand is the sacrifice one would make to obtain any commodity, if the alternative were to be compelled to remain without it. The high price to which provisions rise in times of scarcity, is a proof of the intensity of the demand for them at all times. It proves the price which persons are willing and able to pay for them, when the alternative is to starve. And yet, although the desire of food is equally imperious among the rich in times of plenty, it does not lead them to pay this high price for provisions, because when food is abundant, it could not all be disposed of at such prices; it must fall to such a sum as will bring the effectual demand to an equality with the supply, and then, however intense any man’s desire may be, it will not lead him to pay a high price for that which he can as well procure on cheaper terms.

In the same manner, if a spade makes a man’s labour twenty times as efficacious as it would be if unassisted by any instrument, only of his work is performed by himself, and the remaining must be attributed to the capital. And this is the measure of the intensity of the demand for such an instrument. A labourer working for himself would find it for his interest to give of the produce of his labour to the person who would lend him one, if the alternative was that he should turn up the earth with his naked hands; or if he worked for another, his employer might pay a similar sum for the purpose of supplying him with an instrument. But this profit is not paid, because on account of the abundance of capital in the country, much must be employed in cases where, in proportion to its quantity, it is not so capable of multiplying the efficiency of the labourer; and the profits on this portion must regulate the profits of the rest.

You may remember that the effect of demand and supply, in regulating the price of commodities, is frequently slightly influenced by the cost of production, which determines the average prices, and prevents buyers and sellers, especially in the case of the more durable manufactured commodities, from departing very far from those prices to which they know the value of the article will soon conform itself. But of capital there is not, properly speaking, any cost of production, except that sacrifice of the present to the future which is made by the possessor of wealth, who employs it as capital instead of consuming it for his immediate gratification. The amount of this sacrifice varies very much in different ages and countries, and even in different persons of the same age and country. In many instances it is very slight, since we find that many persons save without any prospect of profit, but merely from the love of accumulation, or the preference of the future to the present. On the other hand, many spend, in their present gratification, what they know they might profitably employ as capital. This prospect, however, of deriving a profit from their accumulations, is a strong additional motive to save, although its influence will vary considerably, according to the manners, habits, disposition, circumstances, and general situation of the country. It will not generally be strongest where the rate of profits is highest, although, cæteris paribus, it would necessarily be so. But without departing from my present purpose, I cannot now enter upon the enquiry of the circumstances, which combined with the rate of profits, will have most influence in strengthening the principle of accumulation in any country.

From what I have said, it may sufficiently appear that some portion of capital must be employed to less advantage, principally on account of the following causes:—1st. Inferior labourers must be employed to use the instruments provided by the capitalist. This, although a real, is yet a slender source of the diminished rate of profits. 2ndly. In order to find employment for all the increased capital, machinery must be resorted to, of greater value in proportion to its efficiency, when labourers are not numerous enough to create a demand for all the instruments of the more efficacious kind that can be procured for them. 3rdly. Articles which are produced partly by means of capital, will overstock the market for them, and must be sold cheaper; and more articles will be made by various descriptions of machinery, which with a higher rate of profits could not exist, as such profits could be procured only by means of such prices as purchasers would be unwilling to pay. These causes of low profits, the effects of capital accumulated in the country, generally come into operation all at the same time, although it is convenient to consider them separately. Each capitalist will endeavour to get as much profit as he can, and his interest, and the necessity of the case, will be his guide in determining him to employ more labourers, or to give higher wages, in order to prevent other capitalists from withdrawing them from him, or to sell his article cheaper, in order to prevent the goods, now produced in greater quantities than heretofore, from remaining on his hands unsold.

It may be thought that this analysis of profits is imperfect, as applying only to the profits of that portion of capital which is employed in machinery, or in assisting labour; but that I appear to have left altogether out of consideration the profits of that portion of capital which is employed in paying the wages of the labourer, or in advancing to him the means of his subsistence while the product of his labour is incomplete or unsold. This is usually called circulating capital, and it is evident that the profits of this must be regulated by the profits of fixed capital. Both must keep their level, or bear their natural proportion to one another; and I have confined my investigations to fixed capital, because I conceived that its profits admitted more readily of a comparison with labour, being regulated by that portion which the necessity of employing all the capital within the country compels to be least efficiently employed.

The additional capital is so mixed up with the former quantity, that no separation can be made, except in imagination. A machine may render labour 1,000 times more productive, and yet may partly consist of that capital which is least efficiently employed, since perhaps a similar machine, made in a less expensive manner, might be nearly as efficient in increasing the productiveness of labour. In such a case, I consider the difference in expense between the two machines as the last application of capital in this respect, and the difference of their efficiency is the measure of the efficiency of such last application. On a future occasion, I shall attempt to point out the secondary causes which influence the rate of profits, and the effects which low profits, produced by increased capital, exercise upon the prosperity of the country. In my next lecture I shall call your attention to the primary causes which regulate the wages of labour.