Front Page Titles (by Subject) Chapter XIX: THE MANUFACTURING POWER AND THE INSTRUMENTAL POWERS (MATERIAL CAPITAL) OF THE NATION. - The National System of Political Economy
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Chapter XIX: THE MANUFACTURING POWER AND THE INSTRUMENTAL POWERS (MATERIAL CAPITAL) OF THE NATION. - Friedrich List, The National System of Political Economy 
The National System of Political Economy by Friedrich List, trans. Sampson S. Lloyd, with an Introduction by J. Shield Nicholson (London: Longmans, Green and Co., 1909).
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THE MANUFACTURING POWER AND THE INSTRUMENTAL POWERS (MATERIAL CAPITAL) OF THE NATION.
THE nation derives its productive power from the mental and physical powers of the individuals; from their social, municipal, and political conditions and institutions; from the natural resources placed at its disposal, or from the instruments it possesses as the material products of former mental and bodily exertions (material, agricultural, manufacturing, and commercial capital). In the last two chapters we have dealt with the influence of manufactures on the three first-named sources of the national productive powers; the present and the following chapter are devoted to the demonstration of its influence on the one last named.
That which we understand by the term 'instrumental powers' is called 'capital' by the school. It matters but little by what word an object is signified, but it matters very much (especially with regard to scientific investigations) that the word selected should always indicate one and the same object, and never more or less. As often, therefore, as different branches of a matter are discussed, the necessity for a distinction arises. The school now understands by the term 'capital' not merely the material, but also all mental and social means of and aids to production. It clearly ought, therefore, to specify wherever it speaks of capital, whether the material capital, the material instruments of production, or the mental capital, the moral and physical powers which are inherent in individuals, or which individuals derive from social, municipal, and political conditions, are meant. The omission of this distinction, where it ought to be drawn, must necessarily lead to false reasoning, or else serve to conceal false reasoning. Mean-while, however, as it is not so much our business to found a new nomenclature as to expose the errors committed under the cover of an inexact and inadequate nomenclature, we will adopt the term 'capital,' but distinguish between mental and material capital, between material, agricultural, manufacturing, and commercial capital, between private and national capital.
Adam Smith (by means of the common expression, capital) urges the following argument against the protective commercial policy which is adopted to the present day by all his followers: 'A country can indeed by means of such (protective) regulations produce a special description of manufactures sooner than without them; and this special kind of manufactures will be able to yield after some time as cheap or still cheaper productions than the foreign country. But although in this manner we can succeed in directing national industry sooner into those channels into which it would later have flowed of its own accord, it does not in the least follow that the total amount of industry or of the incomes of the community can be increased by means of such measures. The industry of the community can only be augmented in proportion as its capital increases, and the capital of the community can only increase in accordance with the savings which it gradually makes from its income. Now, the immediate effect of these measures is to decrease the income of the community. But it is certain that that which decreases that income cannot increase the capital more quickly than it would have been increased by itself, if it, as well as industry, had been left free.'84
As a proof of this argument, the founder of the school adduces the well-known example, refuted by us in the previous chapter, how foolish it would be to plant the vine in Scotland.
In the same chapter he states, the annual income of the community is nothing else but the value in exchange of those objects which the national industry produces annually.
In the above-named argument lies the chief proof of the school against the protective commercial policy. It admits that by measures of protection manufactories can be established and enabled to produce manufactured goods as cheap or even cheaper than they can be obtained from abroad; but it maintains that the immediate effect of these measures is to decrease the income of the community (the value in exchange of those things which the national industry produces annually). It thereby weakens its power of acquiring capital, for capital is formed by the savings which the nation makes out of its annual income; the total of the capital, however, determines the total of the national industry, and the latter can only increase in proportion to the former. It therefore weakens its industry by means of those measures—by producing an industry which, in the nature of things, if they had been left to their own free course would have originated of its own accord.
It is firstly to be remarked in opposition to this reasoning, that Adam Smith has merely taken the word capital in that sense in which it is necessarily taken by rentiers or merchants in their book-keeping and their balance-sheets, namely, as the grand total of their values of exchange in contradistinction to the income accruing therefrom.
He has forgotten that he himself includes (in his definition of capital) the mental and bodily abilities of the producers under this term.
He wrongly maintains that the revenues of the nation are dependent only on the sum of its material capital. His own work, on the contrary, contains a thousand proofs that these revenues are chiefly conditional on the sum of its mental and bodily powers, and on the degree to which they are perfected, in social and political respects (especially by means of more perfect division of labour and confederation of the national productive powers), and that although measures of protection require sacrifices of material goods for a time, these sacrifices are made good a hundred-fold in powers, in the ability to acquire values of exchange, and are consequently merely reproductive outlay by the nation.
He has forgotten that the ability of the whole nation to increase the sum of its material capital consists mainly in the possibility of converting unused natural powers into material capital, into valuable and income-producing instruments, and that in the case of the merely agricultural nation a mass of natural powers lies idle or dead which can bequickened into activity only by manufactures. He has not considered the influence of manufactures on the internal and external commerce, on the civilisation and power of the nation, and on the maintenance of its independence, as well as on the capability arising from these of gaining material wealth.
He has e.g. not taken into consideration what a mass of capital the English have obtained by means of colonisation (Martin estimates the amount of this at more than two and ahalf milliards of pounds sterling).
He, who nevertheless elsewhere proves so clearly that the capital employed in intermediate commerce is not to be regarded as belonging to any given nation, so long as it is not equally embodied in that nation's land, has here not duly considered that the nationalisation of such capital is most effectually realised by favouring the nation's inland manufactures.
He has not taken into account, that by the policy of favouring native manufacture a mass of foreign capital, mental as well as material, is attracted into the country.
He falsely maintains that these manufactures have originated in the natural course of things and of their own accord; notwithstanding that in every nation the political power interferes to give to this so-called natural course an artificial direction for the nation's own special advantage.
He has illustrated his argument, founded on an ambiguous expression and consequently fundamentally wrong, by a fundamentally wrong example, in seeking to prove that because it would be foolish to produce wine in Scotland by artificial methods, therefore it would be foolish to establish manufactures by artificial methods.
He reduces the process of the formation of capital in the nation to the operation of a private rentier, whose income is determined by the value of his material capital, and who can only increase his income by savings which he again turns into capital.
He does not consider that this theory of savings, which in the merchant's office is quite correct, if followed by a whole nation must lead to poverty, barbarism, powerlessness, and decay of national progress. Where everyone saves and economises as much as he possibly can, no motive can exist for production. Where everyone merely takes thought for the accumulation of values of exchange, the mental power required for production vanishes. A nation consisting of such insane misers would give up the defence of the nation from fear of the expenses of war, and would only learn the truth after all its property had been sacrificed to foreign extortion, that the wealth of nations is to be attained in a manner different to that of the private rentier.
The private rentier himself, as the father of a family, must follow a totally different theory to the shopkeeper theory of the material values of exchange which is here set up. He must at least expend on the education of his heirs as much value of exchange as will enable them to administer the property which is some day to fall to their lot.
The building up of the material national capital takes place in quite another manner than by mere saving as in the case of the rentier, namely, in the same manner as the building up of the productive powers, chiefly by means of the reciprocal action between the mental and material national capital, and between the agricultural, manufacturing, and commercial capital.
The augmentation of the national material capital is dependent on the augmentation of the national mental capital, and vice versâ.
The formation of the material agricultural capital is dependent on the formation of the material manufacturing capital, and vice versâ.
The material commercial capital acts everywhere as an intermediary, helping and compensating between both.
In the uncivilised state, in the state of the hunter and the fisher, the powers of nature yield almost everything, capital is almost nil. Foreign commerce increases the latter, but also in so doing (through fire-arms, powder, lead) totally destroys the productiveness of the former. The theory of savings cannot profit the hunter; he must be ruined or become a shepherd.
In the pastoral state the material capital increases quickly, but only so far as the powers of nature afford spontaneously nourishment to the cattle. The increase of population, however, follows closely upon the increase of flocks and herds and of the means of subsistence. On the one hand, the flocks and herds as well as pastures become divided into smaller shares; on the other hand, foreign commerce offers inducements to consumption. It would be in vain to preach to the pastoral nation the theory of savings; it must sink into poverty or pass over into the agricultural State.
To the agricultural nation is open an immense, but at the same time limited, field for enriching itself by utilising the dormant powers of nature.
The agriculturist for himself alone can save provisions, improve his fields, increase his cattle; but the increase of the means of subsistence always follows the increase of population. The material capital (namely, cultivated land and cattle), in proportion as the former becomes more fertile and the latter increase, becomes divided among a larger number of persons. Inasmuch, however, as the surface of the land cannot be increased by industry, and the land cannot be utilised up to the measure of its natural capacity, for want of means of transport, which (as we showed in the preceding chapter) must remain imperfect in such a state of things owing to lack of intercourse; and as moreover the merely agricultural nation is mostly in want of those instruments, intelligence, motives to exertion, and also of that energy and social development which are imparted to the nation through manufactures and the commerce which originates from them, the mere agricultural population soon reaches a point in which the increase of material agricultural capital can no longer keep pace with the increase of population, and where consequently individual poverty increases more and more, notwithstanding that the total capital of the nation is continually increasing.
In such a condition the most important product of the nation consists of men, who, as they cannot find sufficient support in their own country, emigrate to other countries. It can be but little consolation to such a country, that the school regards man as an accumulated capital; for the exportation of men does not occasion return freights, but, on the contrary, causes the unproductive export of considerable amounts of material values(in the shape of implements, utensils, money, &c.).
It is clear that in such a state of things, where the national division of labour is not properly developed, neither industry nor economy can bring about the augmentation of the material capital (material enrichment of individuals).
The agricultural country is, of course, rarely quite without any foreign commerce, and foreign commerce, as far as it extends, also supplies the place of internal manufactures with regard to the augmentation of capital, inasmuch as it places the manufacturer of the foreign country in commercial relation with the agriculturist of the home country. This, however, takes place only partially and very imperfectly: firstly, because this commerce extends merely to special staple products, and chiefly only to those districts which are situated on the sea-coast and on navigable rivers; and secondly, because it is in any case but a very irregular one, and is liable to be frequently interrupted by wars, fluctuations in trade and changes in commercial legislation, by specially rich harvests, and by foreign importations.
The augmentation of the material agricultural capital can only take place on a large scale, with regularity and continuously, if a completely developed manufacturing power is established in the midst of the agriculturists.
By far the greatest portion of the material capital of a nation is bound to its land and soil. In every nation the value of landed property, of dwelling houses in rural districts and in towns, of workshops, manufactories, waterworks, mines, &c. amounts to from two-thirds to nine-tenths of the entire property of the nation. It must therefore be accepted as a rule, that all that increases or decreases the value of the fixed property, increases or decreases the total of the material capital of the nation. Now, it is evident that the capital value of land of equal natural fertility is incomparably larger in the proximity of a small town than in remote districts; that this value is incomparably larger still in the neighbourhood of a large town than in that of a small one; and that in manufacturing nations these values are beyond all comparison greater than in mere agricultural nations. We may observe (inversely) that the value of the dwelling houses and manufacturing buildings in towns, and that of building land, rises or falls (as a rule) in the same ratio in which the commercial intercourse of the town with the agriculturists is extended or restricted, or in which the prosperity of these agriculturists progresses or recedes. From this it is evident that the augmentation of the agricultural capital is dependent on the augmentation of the manufacturing capital; and (inversely) the latter on the former.85
This reciprocal action is, however, in the case of the change from the agricultural state into the manufacturing state much stronger on the part of manufacture than on the part of agriculture. For as the increase of capital which results from the change from the condition of the mere hunter to the pastoral condition is chiefly effected by the rapid increase of flocks and herds, as the increase of capital resulting from the change from the pastoral condition into the agricultural condition is chiefly effected by the rapid increase in cultivated land and in surplus produce, so, in the event of a change from the agricultural condition into the manufacturing condition, is the augmentation of the material capital of the nation chiefly effected by those values and powers which are devoted to the establishment of manufactures, because thereby a mass of formerly unutilised natural and mental powers are converted into mental and material capital. Far from hindering the saving of material capital, the establishment of manufactures is the first thing which affords to the nation the means of employing its agricultural savings in an economical manner, and it is the first means by which the nation can be incited to agricultural economy.
In the legislative bodies of North America it has often been mentioned that corn there rots in the ear from want of sale, because its value will not pay the expense of harvesting it. In Hungary it is asserted that the agriculturist is almost choked with excess of produce, while manufactured goods are three to four times dearer there than in England. Germany even can remember such times. In agricultural States, therefore, all surplus agricultural produce is not material capital. By means of manufactures it first becomes commercial capital by being warehoused, and then by being sold to the manufacturers it is turned into manufacturing capital. What may be unutilised stock in the hand of the agriculturist, becomes productive capital in the hand of the manufacturer, and vice versâ.
Production renders consumption possible, and the desire to consume incites to production. The mere agricultural nation is in its consumption dependent on foreign conditions, and if these are not favourable to it, that production dies out which would have arisen in consequence of the desire to consume. But in that nation which combines manufactures with agriculture in its territory, the reciprocal inducement continually exists, and therefore, also, there will be continuous increase of production and with it augmentation of capital on both sides.
As the agricultural-manufacturing nation is (for the reasons which we have already given) always incomparably richer in material capital than the mere agricultural nation (which is evident at a glance), so in the former the rate of interest is always much lower, and larger capital and more favourable conditions are at the disposal of men of enterprise, than in the purely agricultural nation. It follows that the former can always victoriously compete with the newly formed manufactories in the agricultural nation; that the agricultural nation remains continually in debt to the manufacturing nation, and that in the markets of the former continual fluctuations in the prices of produce and manufactured goods and in the value of money take place, whereby the accumulation of material wealth in the purely agricultural nation is no less endangered than its morality and its habits of economy.
The school distinguishes fixed capital from circulating capital, and classes under the former in a most remarkable manner a multitude of things which are in circulation without making any practical application whatever of this distinction. The only case in which such a distinction can be of value, it passes by without notice. The material as well as the mental capital is (namely) bound in a great measure to agriculture, to manufactures, to commerce, or to special branches of either—nay often, indeed, to special localities. Fruit trees, when cut down, are clearly not of the same value to the manufacturer (if he uses them for woodwork) as they are to the agriculturist (if he uses them for the production of fruit). Sheep, if, as has already frequently happened in Germany and North America, they have to be slaughtered in masses, have evidently not the value which they would possess when used for the production of wool. Vineyards have (as such) a value which, if used as arable fields, they would lose. Ships, if used for timber or for firewood, have a much lower value than when they serve as means of transport. What use can be made of manufacturing buildings, water-power, and machinery if the spinning industry is ruined? In like manner individuals lose, as a rule, the greatest part of their productive power, consisting in experience, habits, and skill, when they are displaced. The school gives to all these objects and properties the general name of capital, and would transplant them (by virtue of this terminology) at its pleasure from one field of employment to another. J. B. Say thus advises the English to divert their manufacturing capital to agriculture. How this wonder is to be accomplished he has not informed us, and it has probably remained a secret to English statesmen to the present day. Say has in this place evidently confounded private capital with national capital. A manufacturer or merchant can withdraw his capital from manufactures or from commerce by selling his works or his ships and buying landed property with the proceeds. A whole nation, however, could not effect this operation except by sacrificing a large portion of its material and mental capital. The reason why the school so deliberately obscures things which are so clear is apparent enough. If things are called by their proper names, it is easily comprehended that the transfer of the productive powers of a nation from one field of employment to another is subject to difficulties and hazards which do not always speak in favour of 'free trade,' but very often in favour of national protection.
[84.] Wealth of Nations, Book IV. chap. ii.
[85.] Compare the following paragraph, which appeared in the Times during 1883: