The Online Library of Liberty

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• Advertisement to the Second Edition.
• Memoir of Robert Malthus.
• Principles of Political Economy.
• Introduction.
• Book I
• Chapter I.: Of the Definitions of Wealth and of Productive Labour.
• Section I.—: On the Definitions of Wealth.
• Section II.—: On Productive Labour.
• Chapter II.: On the Nature, Causes, and Measures of Value.
• Section I.—: On the Different Sorts of Value.
• Section II.—: Of Demand and Supply As They Affect Exchangeable Value.
• Section III.—: Of the Cost of Production As Affected By the Demand and Supply, and On the Mode of Representing Demand.
• Section IV.—: Of the Labour Which Has Been Employed On a Commodity Considered As a Measure of Its Exchangeable Value.
• Section V.—: Of the Labour Which a Commodity Will Command, Considered As a Measure of Value In Exchange.
• Section VI.—: On the Practical Application of the Measure of Value, and Its General Use and Advantages.
• Section VII.—: On the Variations In the Value of Money In the Same, and Different Countries.
• Chapter III.: Of the Rent of Land.
• Section I.—: Of the Nature and Causes of Rent.
• Section II.—: On the Necessary Separation of the Rent of Land From the Profits of the Cultivator and the Wages of the Labourer.
• Section III.—: Of the Causes Which Tend to Raise Rents In the Ordinary Progress of Civilized and Improved Societies.
• Section IV.—: Of the Causes Which Tend to Lower Rents.
• Section V.—: On the Dependance 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.
• Section VI.—: Of the Connexion Between Great Comparative Wealth, and a High Comparative Price of Raw Produce.
• Section VII.—: On the Causes Which May Mislead the Landlord In Letting His Lands, to the Injury Both of Himself and the Country.
• Section VIII.—: On the Strict and Necessary Connection of the Interests of the Landlord and of the State.
• Section IX.—: General Remarks On the Surplus Produce of the Land.
• Chapter IV.: Of the Wages of Labour.
• Section I.—: On the Definition of the Wages of Labour, and Their Dependance Upon Supply and Demand.
• Section II.—: Of the Causes Which Principally Affect the Habits of the Labouring Classes.
• Section III.—: Of the Causes Which Principally Influence the Demand For Labour, and the Increase of the Population.
• Section IV.—: A Review of the Corn Wages of Labour From the Reign of Edward III.
• Section V.—: On the Conclusions to Be Drawn From the Preceding Review of the Prices of Corn and Labour During the Five Last Centuries.
• Chapter V.: Of the Profits of Capital.
• Section I.—: Of the Nature of Profits, and the Mode In Which They Are Estimated.
• Section II.—: Of the Limiting Principle of Profits.
• Section III.—: Of the Regulating Principle of Profits.
• Section IV.—: Of Profits As Affected By the Causes Practically In Operation.
• Section V. —: Remarks On Mr. Ricardo’s Theory of Profits.
• Chapter VI.: Of the Distinction Between Wealth and Value.
• Book II.
• Chapter I.: On the Progress of Wealth.
• Section I.—: Statement of the Particular Object of Inquiry.
• Section II.—: Of the Increase of Population Considered As a Stimulus to the Continued Increase of Wealth.
• Section III.—: Of Accumulation, Or the Saving From Revenue to Add to Capital, Considered As a Stimulus to the Increase of Wealth.
• Section IV.—: Of the Fertility of the Soil, Considered As a Stimulus to the Continued Increase of Wealth.
• Section V.—: Of Inventions to Save Labour, Considered As a Stimulus to the Continued Increase of Wealth.
• Section VI.—: Of the Necessity of a Union of the Powers of Production With the Means of Distribution, In Order to Ensure a Continued Increase of Wealth.
• Section VII.—: Of the Distribution Occasioned By the Division of Landed Property Considered As the Means of Increasing the Exchangeable Value of the Whole Produce.
• Section VIII.—: Of the Distribution Occasioned By Commerce, Internal and External, Considered As the Means of Increasing the Exchangeable Value of Produce.
• Section IX.—: Of the Distribution Occasioned By Personal Services and Unproductive Consumers, Considered As the Means of Increasing the Exchangeable Value of the Whole Produce.
• Section X.—: Application of Some of the Preceding Principles to the Distresses of the Labouring Classes Since 1815, With General Observations.

Section IV.—

Of Profits as affected by the Causes practically in operation.

We come now to the consideration of the various causes which may influence profits in the actual state of things, particularly in this country. And here it is evident that we shall have in operation both the causes already stated, with others which disturb and modify them.

In the progressive cultivation of poor land, occasioned by the increase of capital and population, profits as far as they depend upon natural fertility, will regularly fall; but if at the same time improvements in agriculture are taking place, they may certainly be such as, for a considerable period, not only to prevent profits from falling, but to allow of a rise. To what extent, and for what length of time, this circumstance might interrupt the progressive fall of profits occasioned by the necessity of taking poorer land into cultivation, without such improvements, it is not easy to say; but, as it is certain that in an extensive territory, consisting of soils not very different in their natural powers of production, the fall of profits arising from this cause would be slow, it is probable that for a considerable extent of time agricultural improvements, including of course the improved implements and machinery used in cultivation, as well as an improved system of cropping and managing the land, might more than balance it.

A second circumstance which would contribute to the same effect is, an increase of personal exertion among the labouring classes. This exertion is extremely different in different countries, and at different times in the same country. A day’s labour of a Hindoo, or a South-American Indian, will not admit of a comparison with that of an Englishman; and it has even been said, that though the money price of day-labour in Ireland is little more than the half of what it is in England, yet that Irish labour is not really cheaper than English, although it is well known that Irish labourers when in this country, with good examples and adequate wages to stimulate them, will work as hard as their English companions.

This latter circumstance alone clearly shows how different may be the personal exertions of the labouring classes in the same country at different times; and how different therefore may be the products of a given number of days labour, as the society proceeds from the indolence of the savage to the activity of the civilized state. This activity indeed, within certain limits, appears almost always to come forward when it is most called for, that is, when there is much work to be done without a full supply of persons to do it. The personal exertions of the South American Indian, the Hindoo, the Polish boor, and the Irish agricultural labourer, may be very different indeed 500 years hence.

A third circumstance which has a considerable effect on profits, and not unfrequently occurs, is, the unequal rise of some parts of the farmer’s capital, when the price of corn is raised by an increased demand. Under such a rise, (which if it continues is generally accompanied by an advanced price of standard labour, or a fall in the value of money,) the prices of many home commodities will be considerably modified for some time, by the unequal pressure of taxation, and the unequal rise in the prices of foreign commodities, and of the commodities worked up at home from foreign materials. The rise of corn and labour at home will not proportionally raise the price of such products; and as far as these products together with taxes, form a part of the farmer’s capital, a smaller proportion of the produce, owing to its increased value, will replace it. This remark is applicable to leather, timber, soap, candles, cottons, woollens, &c. &c., all of which enter more or less into the capitals of the farmer, or the wages of the labourer, and are all influenced in their prices more or less by importation.

A fourth circumstance, which favours a rise of profits is a fall in the prices of some important manufactures, as compared with corn, owing to improvements in machinery. This state of things always allows of some diminution in the corn wages of labour without a proportionate diminution of the comforts of the labourer: and if the money price of the farmer’s produce increases without a proportionate increase in the price of labour, and in the materials of which his advances consist, his profits must necessarily rise.

It appears then, that practically, and in the actual state of things, the physical necessity of a fall of profits in agriculture arising from the increasing quantity of labour required to produce the same quantity of food, may be so counteracted and overcome, for a considerable time by other causes, as to leave very great play to the influence of the competitions of capital.

The facts which support this conclusion are numerous and incontrovertible. It may be said, indeed, with truth that the different rates of profits during periods of peace and war, which are observed to take place in all countries, are chiefly attributable to the abundance or scarcity of capital and produce compared with the demand, and not to the varying productiveness of labour on the land. To the instances of this kind which have before been stated may be added the following one, which is so remarkably strong as to be alone almost decisive of the question, and having happened in our own country, is completely open to the most minute examination.

From the accession of George II. in 1727 to the commencement of the war in 1793, the interest of money was little more than 3 per cent. The public securities which had been reduced to 4 per cent. rose considerably after the reduction. According to Chalmers, the natural rate of interest ran steadily at 3 per cent.;* and it appears by a speech of Sir John Barnard’s that the 3 per cent. stocks sold at a premium upon Change. In 1750, after the termination of the war, the 4 per cent. stocks were reduced to 3½, for seven years, and from that time to 3 per cent. permanently.†

Excluding then the interval of war, we have here a period of twenty-two years, during which the general rate of interest was between 3½ and 3 per cent.

The temporary variations in the value of government securities will not certainly at all times be a correct criterion of the rate of profits or even of the rate of interest; but when they remain nearly steady for some time together, they must be considered as a fair approximation to a correct measure of interest; and when the public creditors of a government consent to a great fall in the interest which they had before received, rather than be paid off, it is a most decisive proof of a great difficulty in the means of employing capital profitably, and consequently a most decisive proof of a low rate of profits.

After an interval of nearly seventy years from the commencement of the period here noticed, and forty years from the end of it, during which a great accumulation of capital had taken place, and an unusual quantity of new land had been brought into cultivation, we find a period of twenty years succeed in which the average market rate of interest was rather above than below 5 per cent.; and we have certainly every reason to think, from the extraordinary rapidity with which capital was recovered, after it had been destroyed, that the rate of profits in general was quite in proportion to this high rate of interest.

The difficulty of borrowing on mortgage during a considerable part of the time is perfectly well known; and though the pressure of the public debt might naturally be supposed to create some alarm, and incline the owners of disposable funds to give a preference to landed security; yet it appears from the surveys of Arthur Young, that the number of years purchase given for land, was in 1811, 29¼, and forty years before, 32 or 32½,* —the most decisive proof that can well be imagined of an increase in the profits of capital employed upon land.

The nature of these facts, and the state of things under which they took place, (in the one case, in a state of peace with a slack demand for capital and produce, and in the other, a state of war with an unusual demand for both,) obviously and clearly point to the relative redundancy or deficiency of capital and produce as their cause. And the question which now remains to be considered, is, whether the circumstances which have been stated in this section are sufficient to account theoretically for such a free operation of this principle, notwithstanding the progressive accumulation of capital, and the progressive cultivation of fresh land, as to allow of low profits at an earlier period of this progress and higher profits at a later period. At all events, the facts must be accounted for, as they are so broad and glaring, and others of the same kind are in reality of such frequent recurrence, that they must be considered as at once decisive against any theory of profits which is inconsistent with them.

In the first period of the two which have been noticed it is known that the price of corn had fallen, and that the wages of labour had not only not fallen in proportion, but had been considered by some authorities as having risen. Adam Smith states the fall of corn and the rise of labour during the first sixty-four years of the last century as a sort of established fact;* but Arthur Young, in his very useful inquiries into the prices of corn and labour published in his Annals of Agriculture, seems to think that the fact is not well authenticated, and is inconsistent with the apparently slack demand for labour and produce, and comparatively slow progress of population, which took place during the period in question.† Allowing, however, even a stationary price of labour, with a falling price of corn, not arising from improvements, and the fall of agricultural profits is at once accounted for. Such a state of prices might alone be much more than sufficient to counteract the effects arising from the circumstance of pretty good land being yet uncultivated. When we add, that the other outgoings belonging to the farmers’ capital, such as leather, iron, timber, &c. &c., are supposed to have risen while the price of his main produce was falling, we can be at no loss to account for a low rate of agricultural profits, notwithstanding the unexhausted state of the country. And as to the low rate of mercantile and manufacturing profits, that would be accounted for at once by the increase of mercantile and manufactured products compared with the demand for them, and their consequent diminished prices in relation to labour.

In the subsequent period, from 1793 to 1813, it is probable that all the circumstances noticed in this section concurred to give room for the operation of that principle which depends upon the demand compared with the supply of capital.

In the first place, there can be no doubt of the improvements in agriculture which were going forwards during these twenty years, both in reference to the general management of the land, and the instruments which are connected with cultivation, or which in any way tend to facilitate the bringing of raw produce to market. 2dly, the increasing practice of task-work during these twenty years, together with the increasing employment of women and children, unquestionably occasioned a great increase of personal exertion; and more work was done by the same number of persons and families than before.

If to these two causes of the increased productiveness of the powers of labour we add a fall in the prices of manufactures from improved machinery, and a rise in the price of corn from increased demand, unaccompanied by a proportionate rise of most foreign, and many home commodities, the effect of taking poorer land into cultivation is so likely to be counterbalanced under such circumstances, that in the actual state of many countries, or in their probable state for some centuries to come, we may fairly lay our account to such a result when the occasion calls for it.

I should feel no doubt, for instance, of an increase in the rate of profits in this country for twenty years together, at the beginning of the twentieth century, compared with the twenty years which are now coming on; provided this near period were a period of profound tranquillity and peace and abundant capital, and the future period were a period in which capital was scanty in proportion to the demand for it owing to a war, attended by the circumstances of an increasing trade, and an increasing demand for agricultural produce similar to those which were experienced from 1793 to 1813.

But if this be so, and past experience justifies it, it follows, that in the actual state of things in most countries of the world, and within limited periods of moderate extent, the rate of profits will practically depend more upon the causes which affect the relative abundance or scarcity of capital, and the demand for produce compared with the supply, than on the fertility of the last land taken into cultivation. And consequently, to dwell on this latter point as the sole, or even the main cause which determines profits, must lead to the most erroneous conclusions. Adam Smith, in stating the cause of the fall of profits, has omitted this point, and in so doing has omitted a most important consideration; but in dwelling solely upon the abundance and competition of capital, he is practically much nearer the truth* than those who dwell almost exclusively on the quality of the last land taken into cultivation.

In individual cases, the illustration of this principle is constantly before our eyes. If a capital of a hundred pounds be expended in producing twelve hundred yards of calico, which sell for £120, profits will be 20 per cent. On the other hand, if they sell for £110, profits will be only 10 per cent.; and whether they sell for £110 or £120 will be determined by the state of the supply compared with the demand. The money wages of labour and the value of money may remain the same; but a different proportion of the produce is required to replace the capital:† in the first case a thousand yards are required, in the second nearly eleven hundred. It is evident however that the increase in the quantity of produce required to replace the capital is the consequence, not the cause of the fall of profits. The cause is the fall in the value of the produce of the same quantity of labour, or the same value of capital.

If instead of supposing that the same quantity of produce is obtained by the same value of capital, and sells at various prices, we suppose that the quantity produced and the prices at which it sells are both variable, which is the actual state of things, as profits depend upon proportion not quantity, it will be still true that profits will be determined by the proportion of the value of the produce which goes to replace the capital, whether the quantity remaining for profits be one hundred yards or four hundred yards, whether the labour employed on the land becomes less productive or more productive.

It will be said, perhaps, and truly, that the ordinary prices of commodities are not determined by the accidental state of the supply compared with the demand, but by the ordinary costs of production; but ordinary profits are one of the necessary conditions of the continued supply of commodities, and consequently one of the elements of their ordinary cost to the consumer; and this element is specifically determined by the ordinary state of the supply compared with the demand of the produce of the same value of capital. If the outlay of £100 for a year will obtain a produce which, on an average of ten or twelve years, sells for £120, the ordinary rate of profits will be 20 per cent. If at a future time the produce of the same value of outlay sells on an average during a similar period for £110, the ordinary rate of profits will be 10 per cent. The proportion of the produce which goes to replace the capital will in the latter case be instead of , and it is obvious that this increased proportion of the same produce which is required to replace the capital, is specifically occasioned by a fall in the value of the produce of the same capital.

It appears therefore that whether we refer to immediate or to ordinary profits, they must always depend upon the different values of the produce of the same value of capital determined by the state of the supply, immediate or ordinary, compared with the demand. And if labour be the measure of value which I trust has been shewn, this is the same as saying that profits are determined by the proportion of the value of the produce which goes to pay the labour which has obtained it; and it follows as a direct consequence that profits never fall but when the value of the produce of the same quantity of labour falls, and never rise but when the value of the produce of the same quantity of labour rises.*

[* ] Estimate of the strength of Great Britain, ch. vii. p. 115.

[† ] Ibid. ch. vii. p. 120.

[* ] Annals of Agriculture, No. 270, pp. 96, and 97, and No. 271, p. 215. Mr. Young expresses considerable surprise at these results, and does not seem to be sufficiently aware, that the number of years purchase given for land has nothing to do with prices, but expresses the abundance or scarcity of moveable capital compared with the means of employing it.

[* ] Wealth of Nations, Book I. ch. xi. p. 309, 313, 6th edit.

[† ] Annals of Agriculture, No. 270, p. 89.

[* ] It ought to be allowed that Adam Smith, in speaking of the effects of accumulation and competition on profits, naturally means to refer to a limited territory, a limited population, and a limited demand; but accumulation of capital under these circumstances involves every cause that can affect profits.

[† ] The reader is aware of the corrections to be made for fixed capital.

[* ] It is to be observed, that the various causes which practically affect profits, and which the author has enumerated in this section, are all reducible to one or the other of the two grand distinctions which are treated of in the two foregoing sections.—For instance, agricultural improvements, or increased personal exertions on the part of the labourer, whereby a larger produce is obtained with the same amount of labour, clearly belong to what he has denominated the limiting principle of profits, whilst the various circumstances which affect the value of the same quantity of produce, the labour employed being also the same, belong to the regulating principle of profits.—Ed.