ricardo to mcculloch
[Reply to 358.—Answered by 360]
London 29 March 1820
My dear Sir
I received with great pleasure your kind letter of the 19th inst., and I take advantage of this period of inaction to enter into a little discussion with you on some of the points contained in your article on taxation, in the last number of the Edinbgh. Review, knowing, as I do, that we have both the same object in view, namely the establishment of truth; and therefore I feel no more hesitation in making you acquainted with my sentiments when they differ from your own, than when we are fully agreed. In the article in question, you have, with your usual force and ability, advocated the great truths of the science of Political Economy, which you have yourself before so satisfactorily and so clearly explained; but there are some minor points on which you touch that I request you to reconsider, and if you detect any error in the reasoning by which I support an opinion contrary to yours, have the goodness to communicate it to me, that I may examine it with that care and attention to which I am sure it will be entitled.
The labouring classes in all countries have the very greatest interest in keeping the supply of labour rather under the demand, but they are then most happy when the funds for the support of labour, and consequently the demand for it increase with the greatest rapidity, and their means for supporting their families and contracting of marriages is at the highest level to which it can be raised. It is only because taxation interferes with the accumulation of capital, and diminishes the demand for labour, that it is injurious to the working classes. Sometimes it only retards the rate of accumulation, at other times it arrests it altogether, and on some occasions the taxes by being supplied at the expence of capital itself actually diminish the means of the country to employ the same quantity of labour as before. Wages may be regulated, and may continue for a series of years, on a scale which shall allow the population regularly to increase from year to year in such a proportion as shall double it in 25 years. Under other circumstances this power of doubling may not be possible in less than 50, 100, or 200 years—or population may be so little stimulated by ample wages as to increase at the slowest rate—or it may even go in a retrograde direction. Wages being regulated according to some one of these states may or may not be affected most injuriously to the working classes by taxation.
Suppose them to be in that state of abundance as to encourage the doubling of population in 25 years, and suppose a tax to be laid directly on wages, or on the necessaries on which wages are expended, of 20 pct., what effect will such a tax have on the real comforts of the labourers? None whatever, I answer, unless it diminishes the demand for labour, because it will be immediately transferred to the employers of labour, and will consequently diminish the profits of stock. Suppose wages not to be increased after the tax, every body could employ the same quantity of labour as before, and to that demand would be added the additional demand of government for labour, who cannot expend these taxes without employing soldiers, sailors and many other labourers. This of itself would soon raise the price of labour, and transfer the burden to the employer of labour. If I before employed 10 gardeners, after wages have thus risen, I may not be able with the same funds as before to employ more than 8, and thus the tax of 20 pct. falls on me—no more men are employed, but two men are dismissed from my service, and are taken into the service of Government. The rate of accumulation goes on as before, and no other effect is produced than what would have been produced if a tax of an equal amount had been directly laid on me. Whatever may previously have been the rate of wages, the tax obviously never deteriorates the situation of the labourer unless it diminishes the demand for labour, by affecting the rate of accumulation. Taxes will generally affect the rate of accumulation, and therefore they are generally injurious to the labourer, but when we are carrying on an expensive war and it is necessary to raise large funds within the year, either by loan, or by taxes equal in amount to such loan, the former will I think be most injurious to the labourer, because it will more materially affect the accumulation of capital. If an individual is called upon to pay an annual tax of £100 pr. Annm. instead of a sum of £2000 for once only, he will not make so great an effort to save, because he is seldom sensible that a tax of 100 pr. Annm. is equivalent in value to £2000,—and therefore a system of loans is more destructive to the national capital than a system of heavy taxation to an equal amount.
I must quickly dispatch my remaining observations. Page 157 The distress of the poor is considered as synonymous with diminished resources. Suppose a nation to increase its capital annually at the rate of 2 pct. but that at the same time its population increases at the rate of 2½ pct. is it not clear that there will be annually new demands on its charitable funds? Its annual net revenue, and with it the means of expenditure and enjoyment to the higher classes of society would increase but would be accompanied with a diminution of happiness, if not positive misery to the great mass of the people.
The employment of machinery I think never diminishes the demand for labour—it is never a cause of a fall in the price of labour, but the effect of its rise. If one man erected a steam engine because it was just cheaper to employ the engine than human labour, and if this were followed by a fall in the price of labour it would be no other man’s interest to prefer also the use of the machine. Loans, then, if made from capital, will be supplied from circulating and not fixed capital particularly if the expenditure of government, even with a slight diminution of capital, should as it generally does increase the demand for people. Fixed capital such as buildings, machinery &ca. cannot furnish the means of loans—they, after they are once erected must be employed as capital or thrown by as useless.
You lead the reader to infer that the great discoveries and improvements made by us in machinery and manufactures have been particularly favorable to this country. Excepting for an inconsiderable portion of time are they not equally advantageous to every other country, even if they are retained in this country only?
You say that the corn laws have the same effect as if a tax of 24 millions and a half were levied from the consumers of corn for the public expenditure. I should add, provided the 24 millions and a half received by the landholders be all expended as revenue, and no part be added to capital.
Perhaps you may think me fastidiously minute in my observations—I think so myself, but my object is to ascertain exactly whether our opinions coincide or differ. The general reader would perhaps prefer that his attention should not be distracted by the consideration of such niceties and it may not be material that it should. It is however important to my theory of providing for a heavy expenditure when it arises, by taxes within the year in preference to loans, that I should shew that it is more favorable to the accumulation of capital, to the demand for labour, and to the general happiness.—The single man amongst the labouring class may bear and often does bear his portion of taxation, but the married labourers has the means of repaying himself by commanding increased wages, unless the amount of the tax is so heavy, however laid, that it disturbs the rate of accumulation.
You must not have the least fear of my compromising my opinion on the Corn laws, I have already spoken out, on that subject, and shall again, if I can muster up courage to speak at all. You know however that I have always maintained that the growers of corn in this country should be protected from any peculiar burdens to which they may be subject, but then they should shew that they are so burthened—the fact I believe is that every other trade is taxed in a proportion greater than the growth of corn. My principle is that we may impose restrictions to restore things to their natural relation, but never to destroy it.
I have lately been at Mr. Malthus for a couple of days—he shewed me a chapter of his new work, perhaps that in which his difference with me is most particularly noticed. Iaman interested judge and my decision must be received accordingly. To me it appeared to offer no objections which might not be easily disposed of.
After reading this long letter I am strongly tempted to commit it to the flames—yet I am so doubtful whether a new attempt to convey my opinions to you will be more successful that I think it most prudent to let it go with all its imperfections. In you I know I have a partial judge ever inclined to view my errors and omissions with indulgence. I remain with great esteem