From these difficulties Ricardo escapes by another method. Malthus's theory of population gives him what he requires. The 'natural price of labour' (as distinguished from its 'market price') is, as he asserts, 'that price which is necessary to enable the labourers, one with another, to subsist and perpetuate their race without either increase or diminution.'[312] This is the true 'natural price,' about which the 'market price' oscillates. An increase of capital may raise wages for a time above the natural price, but an increase of population will bring back the previous rate. Ricardo warns us, indeed, that this natural price of labour is not to be regarded as something 'absolutely fixed and constant.'[313] It varies in different times and countries, and even in the same country at different times. An English cottager now possesses what would once have been luxuries. Ricardo admits again[314] that the wages of different classes of labourers may be different, although he does not consider that this fact affects his argument. We may allow for it by considering the skilled labourer as 2 or 1-1/2 labourers rolled into one. The assumption enables him to get out of a vicious circle. He is seeking to discover the proportions in which produce will be divided between the two classes, and which co-operate in the production. The 'demand and supply' principle may show that an increase of capital will tend to increase wages, but even that tendency, as he carefully points out, can only be admitted subject to certain important reservations. In any case, if it explains temporary fluctuations, it will not ascertain the point round which the fluctuations take place. But the two variables, wages and profit, are clearly connected, and if we can once assume that one of these variables is fixed by an independent law, we may explain in what way the other will be fixed. Having got rid of 'rent,' the remaining produce has to be divided between wages and profit. If the produce be fixed, the greater the share of the labourer the less will be the share of the capitalist, and vice versa. But the labourer's share again is determined by the consideration that it must be such as to enable him to keep up the population. The capitalist will get the surplus produce after allowing to the labourer the share so determined. Everything turns ultimately upon this 'natural price'—the constant which underlies all the variations.
One other point is implied. The population is limited, as we see, by the necessity of raising supplies of food from inferior soils. Moreover, this is the sole limit. A different view had been taken which greatly exercised the orthodox economists. It was generally admitted that in the progress of society the rate of profit declined. Adam Smith explained this by arguing that, as capital increased, the competition of capitalists lowered the rate. To this it was replied (as by West) that though competition equalised profits, it could not fix the rate of profit. The simple increase of capital does not prove that it will be less profitably employed. The economists had constantly to argue against the terrible possibility of a general 'glut.' The condition of things at the peace had suggested this alarm. The mischief was ascribed to 'over-production' and not to misdirected production. The best cure for our evils, as some people thought, would be to burn all the goods in stock. On this version of the argument, it would seem that an increase of wealth might be equivalent to an increase of poverty. To confute the doctrine in this form, it was only necessary to have a more intelligent conception of the true nature of exchange. As James Mill had argued in his pamphlet against Spence, every increase of supply is also an increase of demand. The more there is to sell, the more there is to buy. The error involved in the theory of a 'glut' is the confusion between a temporary dislocation of the machinery of exchange, which can and will be remedied by a new direction of industry, and the impossible case of an excess of wealth in general.[315] Malthus never quite cleared his mind of this error, and Ricardo had to argue the point with him. Abundance of capital cannot by itself, he says, 'make capital less in demand.' The 'demand for capital is infinite.'[316] The decline in the rate of profit, therefore, depends upon another cause. 'If, with every accumulation of profit, we could tack a piece of fresh fertile land to our Island, profits would never fall.'[317] Fertile land, however, is limited. We have to resort to inferior soil, and therefore to employ capital at a less advantage. In the Principles he enforces the same doctrine with the help of Say, who had shown 'most satisfactorily' that any amount of capital might be employed.[318] If, in short, labour and capital were always equally efficient, there would be no limit to the amount producible. If the supply of food and raw materials can be multiplied, wealth can be multiplied to any amount. The admitted tendency of profits to fall must therefore be explained simply and solely by the growing difficulty of producing the food and the raw material.
Ricardo's doctrine, then, is Malthus carried out more logically. Take a nation in a state of industrial equilibrium. The produce of the worst soil just supports the labourer, and leaves a profit to the capitalist. The labourer gets just enough to keep up his numbers to the standard; the capitalist just enough profit to induce him to keep up the capital which supports the labourer. Since there can be only one rate of wages and only one rate of profit, this fixes the shares into which the whole produce of the nation is divided, after leaving to the landlord the surplus produce of the more fertile soils. Accepting this scheme as a starting-point, we get a method for calculating the results of any changes. We can see how a tax imposed upon rents or profits or wages will affect the classes which are thus related; how improvements in cultivation or machinery, or a new demand for our manufactures, will act, assuming the conditions implied in this industrial organisation; how, in short, any disturbance of the balance will work, so as to produce a new equilibrium. Ricardo exerts all his ingenuity in working out the problem which, with the help of a few assumptions, becomes mathematical. The arithmetical illustrations which he employed for the purpose became a nuisance in the hands of his disciples. They are very useful as checks to general statements, but lend themselves so easily to the tacit introduction of erroneous assumptions as often to give a totally false air of precision to the results. Happily I need not follow him into that region, and may omit any consideration of the logical value of his deductions. I must be content to say that, so far as he is right, his system gives an economic calculus for working out the ultimate result of assigned economic changes. The pivot of the whole construction is the 'margin of cultivation'—the point at which the food for a pressing population is raised at the greatest disadvantages. 'Profits,' as he says,[319] 'depend on high and low wages; wages on the price of necessaries; and the price of necessaries chiefly on the price of food, because all other requisites may be increased almost without limit.'
Ricardo takes the actual constitution of society for granted. The threefold division into landowners, capitalists, and labourers is assumed as ultimate. For him that is as much a final fact as to a chemist it is a final fact that air and water are composed of certain elements. Each class represents certain economic categories. The landlord sits still and absorbs the overflow of wealth created by others. The labourer acts a very important but in one respect a purely passive part. His whole means of subsistence are provided by the capitalist, and advanced to him in the shape of wages. His share in the process is confined to multiplying up to a fixed standard. The capitalist is the really active agent. The labourer is simply one of the implements used in production. His wages are part of the capitalist's 'costs of production.' The capitalist virtually raises labourers, one may say, so long as raising them is profitable, just as he raises horses for his farm. Ricardo, in fact, points out that in some cases it may be for the farmer's interest to substitute horses for men.[320] If it be essential to any product that there should be a certain number of labourers or a certain number of horses, that number will be produced. But when the expense becomes excessive, and in the case of labourers that happens as worse soils have to be broken up for food, the check is provided through its effect upon the accumulation of capital. That, therefore, becomes the essential point. The whole aim of the legislator should be to give facilities for the accumulation of capital, and the way to do that is to abstain from all interference with the free play of the industrial forces. The test, for example, of the goodness of a tax—or rather of its comparative freedom from the evils of every tax—is that it should permit of accumulation by interfering as little as possible with the tendency of the capital to distribute itself in the most efficient way.
III. VALUE AND LABOUR
To solve the distribution problem, then, it is necessary to get behind the mere fluctuations of the market, and to consider what are the ultimate forces by which the market is itself governed. What effect has this upon the theory of the market itself? This leads to a famous doctrine.
According to his disciple, M'Culloch, Ricardo's great merit was that he 'laid down the fundamental theorem of the science of value.' He thus cleared up what had before been an 'impenetrable mystery,' and showed the true relations of profit, wages, and prices.[321] Ricardo's theory of value, again, was a starting-point of the chief modern Socialist theories. It marked, as has been said,[322] the point at which the doctrine of the rights of man changes from a purely political to an economical theory. Ricardo remarks in his first chapter that the vagueness of theories of value has been the most fertile source of economic errors. He admitted to the end of his life that he had not fully cleared up the difficulty. Modern economists have refuted and revised and discussed, and, let us hope, now made everything quite plain. They have certainly shown that some of Ricardo's puzzles implied confusions singular in so keen a thinker. That may serve as a warning against dogmatism. Boys in the next generation will probably be asked by examiners to expose the palpable fallacies of what to us seem to be demonstrable truths. At any rate, I must try to indicate the critical point as briefly as possible.
The word 'value,' in the first place, has varying meanings, which give an opportunity for writers of text-books to exhibit their powers of lucid exposition. The value of a thing in one sense is what it will fetch; the quantity of some other thing for which it is actually exchanged in the market. In that sense, as Ricardo incidentally observes,[323] the word becomes meaningless unless you can say what is the other thing. It is self-contradictory to speak as if a thing by itself could have a constant or any value. Value, however, may take a different sense. It is the economic equivalent of the 'utility' of Bentham's 'felicific calculus.' It means the 'lot of pleasure' which causes a thing to be desirable. If we could tell how many units of utility it contained we could infer the rate of exchange for other things. The value of anything 'in use' will correspond to the number of units of utility which it contains; and things which have the same quantity of 'utilities' will have the same 'exchangeable value.' Ricardo can thus consider the old problem of finding 'an invariable measure of value.' He points out the difficulty of finding any particular thing which will serve the purpose, inasmuch as the relations of everything to everything else are constantly varying. He therefore proposes to make use of an imaginary measure. If gold were always produced under exactly the same circumstances, with the same labour and the same capital, it would serve approximately for a standard. Accordingly he gives notice that, for the purposes of his book, he will assume this to be the case, and money to be 'invariable in value.'[324] We can thus, on the one hand, compare values at different periods. A thing has the same value at all times which at all times requires 'the same sacrifice of toil and labour to produce it.'[325] The 'sacrifice' measures the 'utility,' and we may assume that the same labour corresponds in all ages to the same psychological unit. But, on the other hand, at any given period things will exchange in proportion to the labour of producing them. This follows at once from Ricardo's postulates. Given the single rate of wages and profits, and assuming the capital employed to be in the same proportion, things must exchange in proportion to the quantity of labour employed; for if I got the same value by employing one labourer as you get by employing two, my profits would be higher. Ricardo, indeed, has to allow for many complexities arising from the fact that very different quantities of capital are required in different industries; but the general principle is given by the simplest case. Hence we have a measure of value, applicable at any given time and in comparing different times. It implies, again, what M'Culloch sums up as the 'fundamental theorem,' that the value of 'freely produced commodities' depends on the quantity of labour required for their 'production.' What is made by two men is worth twice what is made by one man. That gives what M'Culloch calls the 'clue to the labyrinth.'
The doctrine leads to a puzzle. If I can measure the 'sacrifice,' can I measure the 'utility' which it gains? The 'utility' of an ounce of gold is not something 'objective' like its physical qualities, but varies with the varying wants of the employer. Iron or coal may be used for an infinite variety of purposes and the utility will be different in each. The thing may derive part of its 'utility' from its relation to other things. The utility of my food is not really separate from the utility of my hat; for unless I eat I cannot wear hats. My desire for any object, again, is modified by all my other desires, and even if I could isolate a 'desire' as a psychological unit, it would not give me a fixed measure. Twice the article does not give twice the utility; a double stimulus may only add a small pleasure or convert it into agony. These and other difficulties imply the hopelessness of searching for this chimerical unit of 'utility' when considered as a separate thing. It shifts and escapes from our hands directly we grasp it. Ricardo discusses some of these points in his interesting chapter on 'Value and Riches.' Gold, he says, may cost two thousand times more than iron, but it is certainly not two thousand times as useful.[326] Suppose, again, that some invention enables you to make more luxuries by the same labour, you increase wealth but not value. There will be, say, twice as many hats, but each hat may have half its former value. There will be more things to enjoy, but they will only exchange for the same quantity of other things. That is, he says, the amount of 'riches' varies, while the amount of value is fixed. This, according to him, proves that value does not vary with 'utility.' 'Utility,' as he declares in his first chapter, is 'absolutely essential to value,' but it is 'not the measure of exchangeable value.'[327] A solution of these puzzles may be sought in any modern text-book. Ricardo escapes by an apparently paradoxical conclusion. He is undertaking an impossible problem when he starts from the buyers' desire of an 'utility.' Therefore he turns from the buyers to the sellers. The seller has apparently a measurable and definable motive—the desire to make so much per cent. on his capital.[328] Ricardo, unfortunately, speaks as though the two parties to the bargain somehow represented mutually exclusive processes. 'Supply and demand' determine the value of 'monopolised articles,' but the cost of other articles depends not 'on the state of demand and supply,' but 'on the increased or diminished cost of their production.'[329] Why 'not' and 'but'? If supply and demand corresponds to the whole play of motives which determines the bargain, this is like saying, according to the old illustration, that we must attribute the whole effect of a pair of scissors to one blade and not to the other. His view leads to the apparent confusion of taking for the cause of value not our desire for a thing, but the sacrifice we must make to attain it. Bentham[330] said, for example, that Ricardo confused 'cost' with 'value.' The denial that utility must in some sense or other determine value perplexes an intelligible and consistent meaning. It is clearly true, upon his postulates, that the value of goods, other than 'monopolised,' must conform to the cost of production. He speaks as if he confounded a necessary condition with an 'efficient cause,' and as if one of two correlative processes could be explained without the other. But the fact that there is a conformity, however brought about, was enough for his purpose. The demand of buyers, he would say, determines the particular direction of production: it settles whether hats should be made of silk or beaver; whether we should grow corn or spin cotton. But the ultimate force is the capitalist's desire for profit. So long as he can raise labourers' necessaries by employing part of his capital, he can employ the labour as he chooses. He can always produce wealth; all the wealth produced can be exchanged, and the demand always be equal to the supply, since the demand is merely the other side of the supply. The buyer's tastes decide how the capital shall be applied, but does not settle how much wealth there shall be, only what particular forms it shall take. Somehow or other it must always adjust itself so that the value of each particular kind shall correspond to the 'cost of production.' The cost of production includes the tools and the raw materials, which are themselves products of previous labour. All capital itself is ultimately the product of labour, and thus, as Ricardo incidentally says, may be regarded as 'accumulated labour.'[331]
This phrase sums up the doctrine which underlies his theory of value and indicates its connection with the theory of distribution. Ricardo had perceived that the supply and demand formula which would serve sufficiently in problems of exchange, or the fluctuations of market-price, could not be made to solve the more fundamental problem of distribution. We must look beneath the superficial phenomena and ask what is the nature of the structure itself: what is the driving force or the mainspring which works the whole mechanism. We seem, indeed, to be inquiring into the very origin of industrial organisation. The foundation of a sound doctrine comes from Adam Smith. Smith had said that in a primitive society the only rule would be that things should exchange in proportion to the labour of getting them. If it cost twice as much labour to kill a beaver as to kill a deer, one beaver would be worth two deer. In accepting this bit of what Smith's commentator, Dugald Stewart,[332] calls 'theoretical' or 'conjectural' history, Ricardo did not mean to state a historical fact. He was not thinking of actual Choctaws or Cherokees. The beaver was exchanged for the deer about the time when the primitive man signed the 'social contract.' He is a hypothetical person used for purposes of illustration and simplification. Ricardo is not really dealing with the question of origins; but he is not the less implying a theory of structure. It did not matter that the 'social contract' was historically a figment; it would serve equally well to explain government. It did not matter that actual savages may have exchanged beavers and deer by the help of clubs instead of competition in the market. The industrial fabric is what would have been had it been thus built up. It can be constructed from base to summit by the application of his formula. As in the imaginary state of deer and beaver, we have a number of independent persons making their bargains upon this principle of the equivalence of labour; and that principle is supposed to be carried out so that the most remote processes of the industrial machinery can be analysed into results of this principle. This gives a sufficient clue to the whole labyrinth of modern industry, and there is no need of considering the extinct forms of social structure, which we know to have existed, and under which the whole system of distribution took place under entirely different conditions.[333] A great change has taken place since the time of the deer and beaver: the capitalist has been developed, and has become the motive power. The labourer's part is passive; and the 'value' is fixed by the bargaining between the proprietors of 'accumulated labour,' forced by competition to make equal profits, instead of being fixed by the equitable bargain between the two hunters exchanging the products of their individual labour. Essentially, however, the principle is the same. In the last as in the first stage of society, things are exchanged in proportion to the labour necessary to produce them. Now it is plain enough that such a doctrine cannot lead to a complete solution of the problem of distribution. It would be a palpably inadequate account of historical processes which have determined the actual relation of classes. The industrial mechanism has been developed as a part of the whole social evolution; and, however important the economic forces, they have been inextricably blended with all the other forces by which a society is built up. For the same reason, Ricardo's theorem would be inadequate 'sociologically,' or as a formula which would enable us to predict the future distribution of wealth. It omits essential factors in the process, and therefore supposes forces to act automatically and invariably which will in fact be profoundly modified in societies differently organised and composed of individuals differing in character. The very fundamental assumptions as to the elasticity of population, and the accumulation of capital as wages and profits fluctuate, are clearly not absolute truths. An increase of the capitalist's share, for example, at the expense of wages, may lead to the lowered efficiency of the labourer; and, instead of the compensating process supposed to result from the stimulus to accumulation, the actual result may be a general degeneration of the industry. Or, again, the capacity of labourers to combine both depends and reacts upon their intelligence and moral character, and will profoundly modify the results of the general competition.[334] Such remarks, now familiar enough, are enough to suggest that a full explanation of the economic phenomena would require reference to considerations which lie beyond the proper sphere of the economist. Yet the economist may urge that he is making a fair and perhaps necessary abstraction. He may consider the forces to be constant, although he may be fully aware that the assumption requires to be corrected when his formulæ are applied to facts. He may consider what is the play at any given time of the operations of the market, though the market organisation is itself dependent upon the larger organisation of which it is a product. He does not profess to deal in 'sociology,' but 'pure political economy.' In that more limited sphere he may accept Ricardo's postulates. The rate of wages is fixed at any given moment by the 'labour market.' That is the immediate organ through which the adjustment is effected. Wages rise and fall like the price of commodities, when for any reason the number of hirers or the number of purchasers varies. The 'supply and demand' formula, however, could not, as Ricardo saw, be summarily identified with labour and capital. We must go behind the immediate phenomena to consider how they are regulated by the ultimate moving power. Then, with the help of the theories of population and rent, we find that the wages are one product of the whole industrial process. We must look beyond the immediate market fluctuation to the effect upon the capitalists who constitute the market. The world is conceived as one great market, in which the motives of the capitalist supply the motive power; and the share which goes to the labourer is an incidental or collateral result of the working of the whole machinery. Now, though the sociologist would say that this is quite inadequate for his purpose, and that we must consider the whole social structure, he may also admit that the scheme has a validity in its own sphere. It describes the actual working of the mechanism at any given time; and it may be that in Ricardo's time it gave an approximate account of the facts. To make it complete, it requires to be set, so to speak, in a more general framework of theory; and we may then see that it cannot give a complete solution. Still, as a consistent scheme which corresponds to the immediate phenomena, it helps us to understand the play of the industrial forces which immediately regulate the market.