Manual of Political Economy/Book 1/Chapter 4

by Henry Fawcett

CHAPTER IV.

OF CAPITAL.

Definition of capital.WE have already explained that capital is as indispensable a requisite of production as either labour or appropriate natural agents. A very little consideration will render it evident that labourers, whilst engaged in any particular industry, cannot live upon the commodity which their labour is assisting to produce. The ploughman who tills the soil from which, in the following autumn, the harvest will be gathered, is fed with the wealth which his master has saved; or, in other words, the master pays his labourer's wages from the wealth which he has previously saved. The production of wealth, therefore, cannot proceed unless some of the wealth previously produced has been set aside from immediate consumption. The wealth which has been accumulated with the object of assisting production, is termed capital; and, therefore, the capital of the country is the wealth which is not immediately consumed unproductively, and which may, consequently, be devoted to assist the further production of wealth. This is a wide definition, but it is correct and sufficiently definite until the subject has been more fully elucidated.

Fallacy of confounding capital with money.In the general introductory remarks upon wealth, particular attention was directed to that current fallacy which confounds money with wealth. The student, in obtaining his primary conceptions of capital, is not unfrequently confused by a similar fallacy. Capital, like other wealth, is estimated and expressed in money. Hence the idea is encouraged that capital consists of money, to the exclusion of any other commodity. Although, perhaps, adhesion would not often be professed to such a proposition when stated in plain terms, yet, when the error can be partially concealed in some of the difficulties of complicated questions, it will be found to vitiate many popular opinions which at first sight appear plausible. Capital, let it again be borne in mind, is all that wealth, in whatever shape or form it may exist, which is set aside to assist future production. It is true that if, for instance, you ask a farmer how much capital he has with which to work his farm, he will reply that he has so many thousand pounds, but his capital is not actually in money, and even if it were in money it could not fulfil the functions of capital until the money had been exchanged for various commodities. For why does a farmer require capital to work his farm? He requires capital because implements and stock are wanted, and because he must have money, or some other property in hand which he converts into money, in order to pay the wages of his labourers; although a farmer estimates his capital in money, he obtains the amount of this estimate by ascertaining the pecuniary value of the various items of which his capital is composed. In making this calculation, he takes account of the value of his stock, his implements, and the amount of money which it is necessary for him to keep in hand in order to pay his labourers' wages, and to provide the outlay which is requisite for other purposes.

Capital not all in actual employment.It has been just stated that the whole capital of any country is the sum of the wealth existing in any shape or form which has been set aside with the object of being devoted to assist future production. Hence it is manifest that the whole capital of the country is not at any particular time actually employed. This may be readily explained by an illustration.

Let us consider some commodity, such as wheat, which is produced in our own country, and to simplify the matter we will suppose that all the wheat of one harvest is consumed by the time the next harvest is gathered in. Now it may naturally be asked, What portion of this wheat ought at any time to be regarded as constituting capital? Immediately the harvest is gathered in, the wheat is of course so much wealth, and at that time just so much of the wheat as each individual owner intends to employ productively is capital. But this affords no correct estimate of the quantity of this wealth which will be ultimately employed as capital. The intentions of the individual owners may change; he who to-day intends to devote to productive employment so much wealth as is represented by a certain quantity of wheat in his possession, may next day resolve to spend it on unproductive consumption, and therefore, to speak correctly, the amount of the capital of a country varies from day to day, on account of the shifting caprice of individuals. It has been supposed that the whole of this wheat will have been consumed when the next harvest arrives, and then the exact quantity of the wheat which has been employed as capital would of course be known, if the portion of it which had been devoted to productive purposes could be ascertained.

A difficulty stated: Is all the wheat in existence capital?A difficulty may here probably suggest itself, which it is very important should be cleared away. A prime necessary of life such as wheat is never to any large extent wasted or squandered luxuriously; the great bulk of it being always devoted to satisfy the most necessary wants of life. It may therefore be asked. Should not all the wheat which a country possesses be regarded as a portion of its capital, when it is consumed as usefully as any commodity can be? A prodigal farmer may sell his wheat, and squander the money which he obtains for it, but the wheat will not be wasted, and therefore it might be very plausibly urged that the individual owner of a commodity like wheat does not prevent it being productively employed, or, in other words, has not the power of determining whether it shall or shall not form a portion of the capital of the country. We have thus gradually found our way to a difficulty. The subject of capital cannot be considered under too many aspects; it is here that the young student in political economy finds himself most beset with difficulty. He will never become familiar with the fundamental principles of capital by exhibiting them in the form of propositions; they had better be suggested to him by following out some illustration. An adequate grasp is never obtained of the physical principles of mechanics, until the student has solved problems for himself.

The case suggested is this. Suppose the farmers resolved to sell half their wheat, and spend the money upon their own enjoyments; the money for which one half the wheat is exchanged would be thus employed unproductively. Ought this wheat to be regarded as capital? Yes—is the answer which will very probably be given. It is true that the money for which the wheat is sold is employed unproductively, but this will not in any degree prevent the wheat being devoted to useful purposes. The wheat will still be made into bread, and will be consumed in just the same manner as it would have been if the farmers devoted the money for which it was sold to productive purposes, instead of spending it on their own enjoyments. That portion which is exchanged for luxuries is not capital.But suppose the farmers had devoted this money for which the wheat was sold to productive purposes; by just that amount would the capital of the country be increased. The money for which the wheat is sold is not itself consumed; this money is devoted to purchase commodities, and if they are consumed unproductively, an amount of wealth equal in value to the quantity of wheat first exchanged is consumed unproductively, instead of being devoted to increase the capital of the country, and thus assist the future production of wealth. Now our argument implies that when unproductive consumption is spoken of, a tacit assumption is made that the money for which the wheat has been sold is employed, in great part, to purchase luxuries. But luxuries, it may be said, naturally imply waste, and are not devoted to assist the production of wealth. Hence, all that portion of the wealth of a country which consists of luxuries can never be productively employed, and, therefore, can never be made to form a part of a nation's capital. It may, therefore, be asked. Can a farmer be said to diminish the capital of a country, if he does not waste his wheat, but simply sells it to others who will take good care to use it properly? It may further be urged that he does not reduce the capital of the country by buying luxuries; for luxuries cannot be used as capital, and if they were not consumed unproductively by him they would be so by some other person. It might, therefore, appear that wealth is diverted from forming a part of the capital of Of Capital. 21

the country rather by those who produce luxuries, than by those who consume them; it must, however, be borne in mind that the demand of the consumer, and not the arbitrary caprice of the producer, determines the particular commodities which are manufactured. Luxuries, and other articles which cannot be devoted to reproductive employment, would not be brought into the market if it were not for the demand of the consumer. Enough has now been said to establish the proposition that an individual increases the capital of the country, not by spending his wealth on his own enjoyments, but by devoting it to reproductive employment. This is only another corroboration of what has been already stated, namely, that capital is the result of saving. For when wealth is saved, it is not hoarded, but invested; it is then productively employed, and as a consequence at once assumes the functions of capital.

The proposition just enunciated, that an individual diminishes the capital of a country by spending his wealth in luxuries, and increases the capital or the country by saving it, will lead us to another equally important proposition, which it is usual to express by the formula that a demand for commodities is not a demand for labour. Although this form of expression has been very generally adopted, yet we think that advantage will result from enunciating the principle in language which will appear less paradoxical. What is really intended to be asserted is that the purchase of commodities, which are unproductively consumed, does not exert the same influence in increasing the demand for labour as if the wealth with which the purchase was effected were used as capital, and were devoted to the employment of labour. It may be thought that no such difference to the labourer as that just indicated could result, because it may be urged that if a man spends a thousand pounds in the purchase of velvet, a large portion of this thousand pounds will be virtually expended in paying the wages of the operatives who make the velvet, and therefore it may be said, what difference, so far as the labourers are concerned, will it make whether a landowner spends a certain sum of money in the purchase of an article of luxury like velvet, or lays out the amount in employing

BOOK I. CH. IV.

Examination of the proposition that a demand for commodities is not a demand for labour. 22 Manual of Political Economy,

BOOK I. CH. IV.

Unproductive consumption diminishes wealth which might otherwise be used as capital.

labourers in the improvement of his estate? Is not the one course as good for trade as the other? It is, however, easy to show that there is an important difference in the results which follow from these two courses. The purchase of the velvet may no doubt give a certain amount of enjoyment to those who wear it, but it will do nothing to assist the future production of wealth. The wealth which is expended in paying the wages of labourers engaged in the improvement of an estate will be consumed just as certainly as the velvet will be worn out; but the wearing out of the velvet leaves no result behind, whereas, as a direct consequence of employing labourers in the improvement of an estate, the productiveness of the land may be increased by an amount more than equivalent in value to the wealth which has been consumed in improving it. It thus follows that the unproductive consumption of commodities diminishes the amount which may subsequently be devoted to paying the wages of labour; whereas wealth directly expended in paying the wages of labourers will, unless it is unskilfully, and therefore unprofitably, applied, increase the amount which may be expended in wages.

The proposition which has just been established is of much practical importance, because it disproves the idea which is so common that the labourer is benefited by the wasteful expenditure of the spendthrift. Not only is extravagance often excused on the plea that it is good for trade, but saving not infrequently incurs much popular reproach because it is supposed that the person who saves does no good to the labourer. It has, however, we think, been shown that the industrial classes are more benefited by a man who saves wealth and productively employs it, than by one who spends it on his own indulgences.

In thus contrasting the different results which follow from the saving and spending of wealth it has been assumed that the wealth which is saved is devoted to the productive employment of labourers. It may, however, very possibly happen that the work in which labourers are engaged is not reproductive of fresh wealth. Thus they may be employed in making an artificial lake which, though useful for ornament, does not promote the Of Capital. 53

future production of wealth. It will therefore be desirable to consider whether any different consequences result to the labourers as a class when wealth is expended in paying their wages for some unproductive employment instead of being unproductively consumed by its possessor. In order to investigate this point let us inquire what will take place if a thousand pounds which has before been expended in the purchase of velvet is now employed in the making of an artificial lake. Accepting the conclusions which have been arrived at by Mr. J. S. Mill, and other political economists, we have, in editions previous to the sixth, endeavoured to show that the unproductive consumption of wealth by its owners would produce much less beneficial consequences to the labourers than if the wealth were expended in paying their wages, even although they were employed upon some entirely unproductive work. Subsequent consideration has induced us to think that this conclusion requires considerable modification. As previously remarked, in investigating many of the problems connected with capital it often happens that sufficient stress is not laid upon the fact that only a portion of the wealth which is saved in such a country as England is employed as capital in supporting home industry. With the extension of foreign commerce and increased facilities of communication a larger proportion of the wealth which is saved is every year embarked in foreign investments. It may be readily shown that this fact has an important bearing in tracing the results which will follow from employing wealth in paying the wages of unproductive labourers instead of consuming it unproductively. It has been argued by Mr. Mill, and other political economists, that although in the first instance, the amount devoted to wages must be nearly the same, whether a thousand pounds is laid out in velvet or is paid to labourers who are making an artificial lake, yet the consequences which ultimately ensue are very different, and they seek to establish this conclusion by some such considerations as the following. A large part of the thousand pounds which is expended in velvet is employed in paying the wages of the labourers who make the velvet, and therefore it would appear that in the:

BOOK I. CH. IV.

Consequences resulting from devoting capital to paying wages to labourers who produce articles of luxury.

The conclusions arrived at are modified by the ease with which in modern times capital is exported. 24 Manual of Political Economy.

BOOK I.* CH. IV.

Great loss arises from transfer of capital and labour from one industry to another.

first instance the amount expended in wages will be nearly the same whether velvet is purchased, or whether labourers are employed in making a lake. It is, how- ever, contended that if the latter course is adopted a greater amount will ultimately be expended in wages than if velvet is purchased, because with the diminution in the demand for velvet the amount expended in wages in this particular industry will be less than before. Yet the manufacturers of velvet will, as their business is curtailed, be anxious to seek some eligible investment for that portion of their capital which they can no longer employ in their own trade. It consequently follows that although there may be a transfer of capital, yet the aggregate amount of wealth employed as capital, and therefore the amount expended in wages, will be greater, than it would be if wealth, instead of being applied to employing labourers on some unproductive work, were to be used in the purchase of some article of luxury, such as velvet. We cannot help thinking that in thus broadly stating the conclusion two con- siderations of much importahce are lost sight of. In the first place, capital cannot be transfeiTed from one industry to another without considerable loss both to the employer and the employed. It must almost in- variably happen that the employer will have to bear serious loss if he has to dispose of a portion of his fixed capital, or has to devote his building, machinery, and other plant to another industry ; and a not less serious loss may have to be borne by the labourers if they have to seek employment in some other industry to which they are not accustomed, and are thus deprived of the advantage of their acquired skill. Then again, as pre- viously indicated, it does not necessarily follow that the trader who has to seek a new employment for the portion of his capital which is no longer required for his own business will employ it in home industry. It may very possibly be lent to some foreign government, or be embarked in one of the numerous foreign invest- ments which are constantly attracting an increasing amount of English capital. If this should be the case, it would follow that the amount of capital employed in English industry would not be increased by using wealth Of Capital. 25

in the employment of unproductive labourers, instead of consuming it unproductively. Although therefore we believe that too much importance can scarcely be attri- buted to the fact that those who save wealth rather than those who spend wealth are the best friends of the labourer; yet it is perhaps better in stating the principle not to adopt the somewnat paradoxical assertion that a demand for commodities is not a demand for labour. Such a form of expression has, we consider, often induced political economists to lay too much stress on the difference in the effects produced by employing wealth in the payment of wages to unproductive labourers or in the purchase of commodities which are unproduc- tively consumed. The difference should be made to rest not simply upon using wealth in the payment of wages, but upon the circumstance of whether or not it is so reproductively employed that as the result of its con- sumption a greater amount of wealth is created than that which is consumed.

In the course of this chapter it has been frequently remarked that capital is wealth which has been appro- priated to assist future production. Wealth so appropri- ated consists of machinery, stock, implements, and a fund out of which the wages of the labourers are provided; but the capital of the country is not always employed at the greatest advantage, or, in other words, the capital of a country might always administer to the production of a greater quantity of wealth than is actually produced. Capital is wasted through want of skill; inferior machinery is frequently used; industrial enterprises, after having involved a heavy outlay, are often finally abandoned. Wealth which is used as capital, from other reasons, too, never contributes all the assistance it might to the production of wealth. The wages of labourers paid out of capital are generally sufficient to provide some- thing more than the necessaries of life. The worst-paid classes of labourers probably spend some small portion of their wages in luxuries, the consumption of which does not assist, but perhaps rather interferes with, the efficiency of their labour. The advocates of Temperance furnish abundant statistics upon this point. We are assured that the working-men of this countiy annually

BOOKL CH. IV. Capital a- Jrequenily^ waiudor employed^ in^ec- tivdy,. 26 Manual of Political Economy.

spend 3,000,000l. upon tobacco. If it can be proved that tobacco does not benefit, but injures both the body and the mind, then 3,000,000l. of the capital of the country, which in the first place is paid to labourers, and then expended by them in tobacco, is, considered as capital, rendered completely nugatory, because the 3,000,000l. in no way assists the production of wealth. If, moreover, it is true that tobacco cannot be used without detriment, then this 3,000,000l. not only does not assist, but actually is an obstacle to the production of wealth. But it will perhaps be said, Although this sum of money spent upon tobacco does the labourer no good, yet it is not without its beneficial influence; the expenditure of so much money is good for trade, and thus the labourer receives an indirect advantage. The fallacy of such a supposition will be readily understood by recalling the remarks that have just been made, which show that the labourer is benefited by the productive employment of wealth rather than by its unproductive consumption. It is, however, necessary to be extremely cautious in expressing an opinion as to whether the consumption of a particular article does the labourer good. The relations between chemistry and physiology are as yet by no means settled. The theory of food is most imperfectly understood. A chemical analysis may very possibly show that such an article as tea contains none of those ingredients which are commonly considered to nourish the human frame; and hence a rash and ignorant assertion is often made that tea is not a necessary of life, and that therefore a heavy tax upon tea is no hardship to the labourer; the tax, it is urged, is simply a salutary sumptuary law, because the consumption of tea ought rather to be discouraged than encouraged. But although tea may not nourish the body, yet it undoubtedly soothes the mind, and this is equally important; for without some such soothing influence, life would be almost intolerable, and even the body itself would be wasted by the weariness of the mind.

Enough has now been, perhaps, stated to establish the proposition that although industry is maintained by capital, yet that there is always in a country sufficient capital to support more industry, or, in other words, to Of Capital. 27

administer to the production of a greater quantity of wealth than that which is actually produced.

Intimately connected with this portion of the subject of capital there is a very widespread misconception that there would be a glut of capital if it were increased beyond a certain point; in fact, that capital might be so augmented that no industry would be found upon which it could be employed. Therefore, a certain waste of capital is considered necessary in order to prevent such a glut. Now, it has been explicitly stated that capital is the result of saving, and therefore if capital is increased, the increase must be due to greater saving. Let it therefore be supposed that the rich spend much less upon luxuries, and resolve to employ labourers with the money thus saved. It may be imagined that if such saving were continued, our various industrial marts would soon be overstocked, and that warehouses would be filled with goods for which there was no demand. There are few even amongst political economists who do not sometimes write and speak as if they believed that the unproductive expenditure of the rich is required to give adequate employment to the poor. But if such an increase of capital as that described should occur, two suppositions may be made; an increase of population proportionate to the increase of capital may occur; or, secondly, the population may remain the same as it was, before the increase of capital commenced.

The first case presents no difficulty; the increased capital would be required to support the increased population. But the second case must be carefully considered, and it at once suggests this difficulty: if all the labourers were previously fully employed, how could the increase of capital give additional employment to labourers?

A particular point, which may be keenly disputed in an abstract science, such as political economy, is frequently completely obscured in the ambiguities of general language: and, of this, the question under discussion affords a striking example. It therefore becomes very necessary, as a preliminary process, to attribute a distinct meaning to the above expression,—'giving additional employment to the labourers.' The augmentation in the capital of the country has been supposed

BOOK I. CH. IV.

Fears of a 'glut' of capital are based upon misconception.

An increase of capital might accompany an increasing or a stationary state of population.

In either case the fear of a glut are imaginary. 28 Manual of Political Economy.

BOOK I. CH. IV.

to result from the diminished consumption of luxuries on the part of the rich. It is assumed that all the labourers were previously fully employed. But a new fund, which is now intended to be paid to the labourers, has arisen from the increased savings of the rich; where, therefore, are the labourers amongst whom this increased fund is to be distributed? Those labourers, it is true, who have manufactured the luxuries which the rich now no longer purchase, will be thrown out of employment. But the capital of the manufacturers of these luxuries will be now seeking fresh investments, and will be therefore sufficient to give employment either directly or indirectly to the same number of labourers as were previously maintained by it, and therefore the new capital created by the increased savings of the rich still apparently remains unemployed. But although the assumption has been made that all the labourers were previously fully employed, yet let us consider what this means. It must be interpreted thus: That all able-bodied labourers were in full employment, and that they received certain wages for a certain quantity of work. There can be no doubt that the labourers would willingly receive more wages if they could be obtained. It is quite impossible that the wages can be increased unless the capital is increased; now, however, there is an increase of capital, and therefore the wages of the labourers will rise. If the labourers were before supplied with all the necessaries of life, they in their turn will begin to consume more luxuries, and the labour which before had produced luxuries for the rich is now available to meet this new demand on the part of the labourer. It may, however, be argued that if the capital continued in this way to increase, the labourers' wages would also be constantly increasing, and at length all their wants might be satisfied. When such a happy event was consummated, then the hours of toil would be shortened, and men would not be compelled to labour so ceaselessly as at the present time. Human beings are not endowed with an uncontrollable instinct for physical toil; the wants of life must be satisfied by physical labour, but civilization has no nobler mission to fulfil than to diminish the labour which is required to satisfy the physical wants of life. Hence the vaunted Of Capital. 29

progress of civilization must appear delusive to that great majority of the human race who toil for hire, and who have found that the hours of their toil have only been slightly lessened. Generations after generations pass away whose minds remain undeveloped, and whose bodies have had to work with the constancy and the regularity of a machine. Political economy will assist us in understanding the means by which the labourer's toil is to be lightened. Let it not then be called a harsh or degrading science, for no study can fill our minds with brighter anticipations for the future than one which will enable us to comprehend some of the requisites which will afford, to a greater number, "that only true and most supreme happiness—the development of the human faculties to a harmonious and consistent whole."

Since capital is the result of saving, it is often erroneously considered that capital is wealth which is set aside with the object of not being spent; but this is a fundamental misconception, for capital cannot fulfil any of its functions except by being wholly or partially consumed. Thus, capital provides the fund from which the wages of labour are paid, and these wages are, of course, consumed in ministering to the wants of the labourer, and in supplying him with all the various necessaries of life. If a man has so much wheat, it is wealth which may at any moment be employed as capital; but this wheat is not made capital by being hoarded; it becomes capital when it feeds the labourers, and it cannot feed the labourers unless it is consumed. These considerations apply to capital existing even in a more permanent form, such as machinery. All machines must in time gradually wear out; a steam-engine, durable as it may appear, is only capable of performing so much work; but a steam-engine is capital, because it assists the production of wealth, and therefore it only fulfils the functions of capital when it is in motion; but every hour that it is kept in motion contributes somewhat to its ultimate wearing out. It is therefore manifest that all the wealth of the country, in whatever form it may be, can only perform the functions of capital by being wholly or partially consumed. The capital of a country is constantly being consumed in order to produce more

BOOK I. CH. IV.

Capital must be consumed in order to fulfil its functions. 30 Manual of Political Economy.

BOOK I. CH. IV.

Practical application of these principles.

Effects of war.

wealth, and therefore capital is maintained by perpetual reproduction, and not by hoarding and keeping wealth out of consumption.

The leading propositions with regard to capital have now been discussed, and they afford principles which will enable us to investigate economic problems of the greatest interest and importance. An endless variety of such problems bearing upon the subject of capital may be readily suggested, and the student should zealously apply himself to their solution. Let him not suppose that he is wasting time upon the mere rudiments of the science; he may rest assured that, if he fully comprehends the subject of capital, his future successful progress in the science is assured, and that he will become one of those who can apply the principles of political economy to those financial and social questions which are the topics of everyday discussion.

It will be, perhaps, useful to our readers if we give one or two practical applications of the laws of capital which have been enunciated in this chapter. One such application is suggested by considering the rapidity with which a country recovers from the ravages of a disastrous war. This phenomenon was first fully elucidated by Dr. Chalmers. A conqueror overruns a country, and destroys every vestige of accumulated wealth which he can discover. A great portion of the food with which the labourers were to be fed is gone; machinery and other appliances with which industry is assisted are destroyed. The capital of the country appears to be almost lost, and when it is remembered that the future production of wealth depended upon this capital, it might be supposed that production would cease, and that the country must for years remain the same desolate waste. But, on the contrary, countries which have been thus ravaged and pillaged, have in a few years revived, and seemed to be as prosperous as before. The history of Athens, and the French Wars in the Palatinate, afford many striking examples of a rapid recovery from the devastation of war. The remarkable rapidity with which France recovered her commercial and financial prosperity after the conclusion of the war with Germany in 1870-71 is another example in point. Within four years of the Of Capital. 31

time when her capital city and no inconsiderable portion of her territory were occupied by the invader, she seemed to have recovered more than her former prosperity. Her revenue was never in a more flourishing condition than in 1875, although within this period of four years she had had to pay to Germany a war indemnity of £200,000,000. This revival of prosperity admits of a very simple explanation. It has been shown in this chapter that the capital which at any time exists in a country is always sufficient to administer to the production of a much greater amount of wealth than that which is produced; or, in other words, the production of wealth which actually takes place might be effected with the aid of much less capital than the amount which is applied. There, therefore, always exists a considerable excess of capital which might be wholly destroyed without necessarily impeding the production of wealth. The industrial efficiency of the labourer can for a time be maintained although his wages be reduced to a point which allows no margin for luxury or enjoyment. If, therefore, in a country ravaged by war, there should be just enough food left for the labourers to live upon until the next harvest is gathered in, and if also they had the necessary agricultural implements and seed, there is no reason why the country should not soon be restored to its former fertile and well-cultivated appearance. But if the implements of agriculture were destroyed, cultivation could not proceed until they were replaced; and the after consequences of the war would be more permanently disastrous.

As a nation advances in commercial prosperity, a constantly increasing quantity of national wealth assumes a permanent and fixed form. The docks, the railways, our unsurpassed mercantile navy, the great manufactories of Lancashire and Yorkshire, with their machinery as costly as it is ingenious; these works, and not the food and clothing stored in our warehouses, are the striking evidences of England's vast accumulated wealth. If all the food were destroyed except just enough to prevent the people starving, England in one year might present an unchanged aspect of commercial prosperity; for the food which is stored at any particular time is destined to

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Commercial progress increases the evils of war. 32 Manual of Political Economy.

BOOK I. CH. IV.

Should wars be paid for by increased taxation?

be consumed, and it is only that portion which maintains productive labourers that ministers to the future production of wealth. But if an invader should ever range unrestrained over these islands, and should destroy the wealth which exists in a permanent form, such as public works, machinery and buildings, then the disaster could not soon be repaired, and England would suffer for a far longer period than did poorer nations, conquered in more backward times. Hence the richer a country is, the more severe may be the injury inflicted on her by war, if the enemy should destroy any considerable part of the wealth which is in the form of fixed capital and which constitutes her industrial plant. If Germany had adopted this policy in her war with France, it would have been impossible for France to have recovered her prosperity with the remarkable rapidity to which allusion has just been made. Of late years a feeling of false humanity has attempted to make the rights of private property respected in war. Life may be sacrificed with as much prodigality as ever. The foremost mechanical genius of this mechanical age is devoted to the production of weapons of death; but civilization, it is said, demands that there should be no wanton destruction of property. No such attempt to palliate the material disasters of war ought to be encouraged; war will be rendered less frequent, if a whole nation is made to feel its terrible consequences, instead of concentrating all the horrors in the sacrifice of thousands of helpless victims who may be marshalled at the caprice of a despot. If any, nation should ever threaten England with invasion, England ought to speak in unmistakable language that her vengeance should not be confined to a retributive slaughter of soldiers, but that she would destroy all the public works upon which the wealth of the nation mainly depended. This would give a practical check to vaunting ambition, and might rouse a nation to restrain the military designs of the most despotic ruler.

This digression suggests a consideration of the much debated financial question, whether any extraordinary national expenditure, such as is caused by a war, ought to be defrayed by a loan or by increased taxation? England has resorted to loans, and a permanent record of this financial policy is afforded by a national debt, larger than the aggregate amount of the debts of all other European nations.^[1] Mr. Gladstone in his budget-speech of 1854 evoked the enthusiasm of the House of Commons by the declaration that in future the financial policy of England was to be reversed. The expenses of the Russian War were to be defrayed entirely by increased taxation, and thus posterity would inherit the assumed advantages of that contest, unencumbered by the penalties of augmented pecuniary burdens. The virtuous resolution of Parliament was not maintained, and the Russian War added 50,000,000l. to our permanent debt. It would be foreign to our immediate subject to discuss to what an extent the present generation is justified in burdening future generations; there can however be no doubt that the whole of the money required for the Russian War might have been raised by taxation.

A loan may be obtained from two sources; it may be taken from the capital of the country, or it may be provided from increased savings. If capitalists consider that the terms offered by the Government afford an eligible investment, they may be induced to take some of the capital employed in various commercial undertakings, and lend it to the Government. Now let us trace the consequences of such a diversion of capital from reproductive industry. It may be thought that if the Government spends the loan at home, the loan has not diminished the capital of the country; it has merely caused a portion of it to be diverted to other purposes. The Government, however, will ordinarily spend the loan in warlike materials. Cannon-balls, gunpowder, and mortars are commodities which cannot be appropriated to assist the future production of wealth, labourers cannot be fed by them, and therefore, when the loan is converted into such commodities, it cannot form a 34 Manual of Political Economy.

BOOK I. CH. IV.

Loans applied to public works.

portion of the capital of the country. If, however, the capital which has been contributed to the loan had remained with its original possessors, it would in the undertakings in which it was employed, in all probability, have contributed to the production of some useful commodities which might afterwards have been applied as capital. Upon such an hypothesis, therefore, the capital of the country is diminished in consequence of the loan; the labourers will ultimately suffer, because since there is less capital there will be a smaller sum to be distributed amongst them.

As a second hypothesis, let it be supposed that the loan, after being raised in a country, is productively employed by a Government. Where industrial enterprise is backward, it may happen that many important undertakings, such as railways, canals, and irrigation works, will not be carried out by any one but the Government. A loan which is raised under such circumstances will cause an augmentation in the capital of the country, unless the whole of the loan is obtained from wealth already performing the functions of capital. This is scarcely a possible supposition; there is never this active employment of capital by private individuals in countries where industrial enterprise is backward. The money lent to the Government would no doubt, to a considerable extent, be supplied from wealth which has been hoarded. The addition which may be made to the capital of a country by devoting a loan to reproductive purposes may be much greater than is here described; for it generally happens that a large portion of the loan is obtained from foreign countries. Thus the Government railways of Russia and the Public Works of India have been to a very large extent constructed by means of English capital. In the contrast which has just been drawn between the certain loss and possible gain which may ensue upon the unproductive or productive employment of loans, it must not be supposed that a Government is justified under all circumstances in raising loans for industrial undertakings. In the first place the interference of the Government may check private enterprise, and it is always better that trade and industry should as far as possible be left to private Of Capital. 35

enterprise. Government management is almost invariably wasteful and inefficient. Even when the circumstances warrant the Government in raising a loan for some industrial work, it often happens that the advantage which such a loan might bring to the country is to a great extent counteracted by the wasteful manner in which the work is carried out. The history of the Public Works Department in India affords numerous examples of the truth of this remark.

But again, referring to loans which are unproductively expended by the Government, it may not unnaturally be asked:—Why should the unproductive expenditure of a Government impoverish a nation more than if the same amount of wealth was spent unproductively by individuals? In one sense, no doubt, a nation is not rendered poorer, as may be shown from the following considerations: Suppose, for instance, we wish to make an estimate of the whole wealth of the English nation. All the wealth possessed by Englishmen in the funds should be omitted from this estimate. If it were not so, the same wealth would be counted twice over. Suppose A has a mortgage of 10,000l. on B's estate. The mortgage is wealth to A; but it is not a part of the nation's wealth, because the mortgage simply shows that B's estate is not entirely his own property, but that A has a share of it, the value of which share is equivalent to the amount of the mortgage. Similarly the fundholders have a mortgage upon the industry of the nation; and if the fundholders were all English, and the nation repudiated its debt, the wealth of the country would not in the slightest degree be either decreased or augmented: a most unjust confiscation of property would be perpetrated, but there would have been no destruction of wealth; for what the fundholders would lose the tax-payers would gain. The national debt, considered in this aspect, is a mortgage upon the industry of the nation; and the creation of a mortgage cannot diminish the wealth of a nation unless the persons who own the mortgage should be foreigners, when, of course, a portion of the national wealth is transferred to another country. These considerations show that if the raising of a loan encourages money to be saved, the loan might be spent in the

BOOK I. CH. IV.

Loans applied to unproductive purposes. 36 Manual of Political Economy.

BOOK I. CH. IV. Effects of loans in general.

most unproductive manner possible without in any way diminishing the national wealth. There is, however, a difference in the consequences which result when money is spent unproductively by individuals, and when the same money is subscribed to a loan, which is spent unproductively by Government. In the first case, where individuals spend the money unproductively, no one has to pay them anything for doing so; but in the second case, where these individuals lend the money to the Government to be spent unproductively, the whole nation has annually to pay a certain penalty in consequence of this unproductive expenditure. The penalty paid is the interest received by the lenders of the money.

In estimating the effects of a loan we have these general principles to guide us: The loss of the labourer is in proportion to the extent to which the loan encroaches upon the capital of the country. A loan may increase the capital of a country either by encouraging greater saving, or by inducing capital to be subscribed to the loan from other countries. In this case the labourer may receive an immediate benefit, proportioned to the increase of capital caused by the loan. Indian railways have been constructed by loans subscribed almost entirely in England. It has been calculated that during little more than twelve years ll,000,000l. was paid to the natives of India for their labour upon railways; and, since this amount was imported capital, the labouring population of India derived the same advantage as if private capitalists had decided to spend an additional 11,000,000l. in the employment of labour. Whether the advantage is permanent or not depends on whether the railways ultimately prove to be remunerative. Although it now appears probable that the Indian railways will in the aggregate yield a fair profit on the capital expended in their construction, yet for many years they failed to yield this profit, and a heavy deficit had to be made good out of the general taxation of the country. It must be remembered that this taxation had to be borne by the whole people, many of whom lived too far from the railways to derive any advantage from the extra demand for labour which their construction created. If, however, a loan in any way causes the capital of the country to Of Capital. 37

be increased, the labourers will receive immediate benefit, even if the loan is spent unproductively; on the contrary, the employers will, under the same circumstances, suffer a loss, because wages will rise as a consequence of capital being increased.

The ultimate effects of a loan upon all classes depend entirely upon the manner in which the loan is spent. If it is spent unproductively, the whole nation will have to pay a permanent penalty for the extravagant expenditure. If it is devoted to works of industrial usefulness, which would not be carried out by private enterprise, then the nation may be greatly enriched.

In quoting warlike materials as an example of an unproductive expenditure on the part of Government, it is intended to express no opinion adverse to military preparations. Vast sums have been, and will probably again be, squandered in war; but there can be no greater impediment to the production and accumulation of wealth than a want of security from hostile attack; and therefore it is absolutely necessary, even for the interests of commerce, that the defences of the country should be adequately maintained.

Let us now examine what different consequences ensue if an increased expenditure is supplied by taxation instead of by loan. Increased taxation is obtained in different ways in different countries. In our own country there are probably only two sources available for largely augmenting the revenue. These are the income-tax and an increase of the duties upon some commodities of general consumption, such as tea. Let it be supposed that recourse is had to both these expedients. An income-tax may be paid in two ways; it may be paid out of income, or it may be paid out of capital. Thus a manufacturer who is charged with lOOOl. additional income-tax, may pay the amount by increased saving, or, in other words, by diminishing his personal expenditure. If this is done, his capital is in no way affected, and therefore the labourers do not suffer; the important thing for them is that no encroachment should be made upon capital. But it will perhaps be said, that if the people who pay the increased income-tax are induced to retrench their expenditure, trade will suffer in consequence of their purchasing

BOOK I. CH. IV. Effect of raising money by taxation instead of loan.

An income-tax, if paid out of income, does not injure labourers. 38 Manual of Political Economy.

BOOK I. CH. IV.

if paid out of capital it injures the labourers.

fewer commodities, and that the labourers will thus be injured because dull trade is always prejudicial to them. But here we must once more recall the remarks we have previously made to show how little the labourer is benefited by the unproductive consumption of wealth. If the income-tax is paid from income and not out of capital, the labourers may derive a very decided advantage from an increased income-tax, because a portion of the money which is thus obtained by the Government is sure to be employed as capital, since it will be paid in wages to artisans, shipwrights, and other classes of labourers engaged by the Government. One of the advantages often attributed to a democratic suffrage is that the people have a direct interest in checking a reckless expenditure, and it is also urged that it is the interest of the rich in opposition to the poor to encourage heavy taxation. But the labourers will in every way be greatly profited by increased expenditure if the money is provided by an income-tax, which is sure to be partly supplied from increased economy, and which, in this country, it has never been proposed to levy upon the labouring population. In a country so rich as England, even a heavy income-tax would probably in the main be paid out of income, and not out of capital. Such a tax, therefore, would not seriously interfere with the production of wealth, but would most materially encroach upon the means of enjoyment of the majority of those who pay it. Even in the richest country, if an income-tax continues to be increased, it must at length cease to be chiefly paid out of income. Directly it encroaches upon the capital of the country, the tax becomes doubly burdensome and disastrous, the production of wealth will be impeded, the position of the labourers must be rapidly deteriorated, and the finances of the country will be gradually brought into a most critical state. In a poor country, such as India, an income-tax is a much more hazardous expedient, than in a wealthy country like our own.

We have now pointed out some of the effects which follow both from loans and from increased taxation, and there can be little doubt that loans ought to be avoided as far as possible. A loan, however, is perfectly Of Capital. 39

justifiable when it is necessary to resort to so high an income-tax that it must in great part be paid out of the capital of the country, or when taxes on commodities have been raised to the point at which further increase is attended with a diminution of revenue. In both these cases the production of wealth is at once impeded. If we had to decide between a loan and taxation as a mere abstract question concerning the production of wealth, there would be little hesitation in deciding against the loan, because a loan would generally be paid more entirely out of capital. It is, however, impossible to frame a general maxim which will apply to every case. Before a decision can be arrived at as to the extent to which additional expenditure should be met by a loan or by increased taxation, the economic circumstances of the country ought to be most carefully considered. Thus it may very possibly happen that additional taxation may be imposed without causing any serious inconvenience to the mass of the people or without to any appreciable extent interfering with industrial progress. The circumstances, however, of another country may be such as to cause the gravest evils to be associated with an increase of taxation. For example, the financial condition of India is such as to render it impossible to raise any considerable increase of revenue from taxation without producing very serious consequences. Past experience has shown that it is extremely difficult to raise revenue in India by any form of direct taxation, such as the income-tax; and any indirect tax is comparatively speaking unproductive unless it can be imposed on some article of general consumption. The mass of the Indian people are so poor, often earning wages of only 3d. or 4d. a day, that the only article they consume which admits of taxation is salt. The salt duty in India is one of the heaviest imposts that is levied in any country on a first necessary of life, and additional revenue could not be obtained from it without inflicting severe suffering upon the Indian people.

These discussions upon the relative advantages and disadvantages of loans and taxation will show the importance of arranging a tax so that it should cause the least possible diminution of capital. It is, therefore,

BOOK I. CH. IV.

A general principle of taxation. 40 Manual of Political Economy. BOOK I. CH. IV.

Circulating and fixed capital.

extremely impolitic to tax a raw material. Suppose it were determined to raise a certain sum by taxing cotton, a tax on cotton goods would be far preferable to a tax on raw cotton. If a manufacturer were obliged to pay lOOl. upon a certain quantity of raw cotton, he would thus have to give to the Government lOOl. which he intended to employ as capital, and therefore the tax would be entirely taken out of capital. But suppose the Government said, We will let you manufacture your cotton, and then you shall pay us the same amount, by levying a tax upon the manufactured goods. The result of the tax would be, that the price of cotton goods would rise, the manufacturers would be able to pay the tax out of the increased price obtained for their goods, and the tax would not, under these circumstances, in any degree diminish the capital of the manufacturers.

It will have been remarked, that every kind of wealth, which in any way assists future production, has been, in this chapter, described as capital. Capital, therefore, is not confined to the food which feeds the labourers, but includes machinery, buildings, and, in fact, every product due to man's labour which can be applied to assist his industry; but capital which is in the form of food does not perform its functions in the same manner as capital that is in the form of machinery: the one is termed circulating capital, the other fixed capital. This is a real distinction from which many important consequences follow. Circulating capital is only used once in order to fulfil any particular purpose; fixed capital may continuously repeat the assistance which it lends to industry. A store of food fulfils the functions of capital when it feeds labourers, but in feeding the labourers it is consumed; it cannot repeat the service which it has rendered. But the same looms, set in motion by the same steam-engine, will continue to weave cotton cloth through a long succession of years. The same ploughs till the land for many successive crops. The capital with which a road is made does not facilitate the transport of wealth for any limited period; but, if a slight sum is spent to keep the road in repair, it will permanently serve the same industrial purposes. The capital expended on the great irrigation works of India, may, Of Capital. 41

through countless ages, fertilize the same tracts of land. Circulating capital, since it is destroyed by one use, must receive an immediate return; the application of fixed capital is rewarded by industrial advantages continued for a long period of time. A farmer expects that each successive crop will remunerate him for the wages he has paid during the current year. But if he purchases a steam thrashing-machine, he does not expect that his outlay will be returned to him in one year; he hopes to use the machine for a great number of years, and thus he will be gradually repaid for his original outlay. As another example, raw material is circulating capital to a manufacturer: the raw cotton is only once woven into cloth; and the manufacturer, when he sells the cloth, is repaid the sum which he has expended in the raw material. But the money which he has invested in fixed capital—such as the machinery used in his manufactory—is gradually returned to him. When the capital which administers to the production of any wealth is entirely circulating, the amount of wealth produced must in value be at least equal to the capital employed; for since this capital, according to our hypothesis, is circulating, it is entirely consumed by one use, and therefore the particular industry would not be remunerative unless the value of the wealth produced was somewhat more than sufficient to replace the capital consumed. All capital, as we have before said, is intended to be either sooner or later consumed: circulating capital is destroyed by once ministering to the production of wealth; but capital is maintained by reproduction. Hence, since circulating capital implies immediate consumption, circulating capital mast also necessarily imply immediate reproduction. Fixed capital, however, may repeat for a long period the assistance it renders to production; fixed capital, therefore, is only gradually consumed, and the amount of wealth expended upon fixed capital is not immediately reproduced. The most important practical consequences follow from these considerations. Let it be supposed that a considerable amount of capital, which has been previously employed as circulating capital, is converted into fixed capital; when employed as circulating capital it was at once reproduced, and therefore

BOOK I. CH. IV.

Practical consequences of the distinction between fixed and circulating capital. 42 Manual of Political Economy.

BOOK I. CH. IV.

A temporary injury may be inflicted upon labourers by the conversion of circulating into fixed capital.

the wealth which this capital produces must at least be sufficient in amount to enable the capital to be re-created. But the same immediate reproduction of wealth does not take place if the capital is converted into fixed capital; and therefore there need not immediately be produced so large an amount of wealth as if the capital were consumed by a single use, and had, in consequence, to be at once reproduced. Now, labourers derive their wages from circulating capital; hence, if the circulating capital is diminished, their wages will temporarily fall. As an example, the construction of a railway may cause circulating to be converted into fixed capital. Suppose that 10,000,000l., previously paid to agricultural labourers, is now paid to railway labourers: the agricultural labourers would consume their wages; but then their labour would at once produce something which would be again consumed, and which would be again employed as circulating capital. The railway labourers will be as usefully, or even more usefully, employed than the agricultural labourers. The nation is not made poorer by this transfer of capital from one industry to another; she has her railway instead of the commodities which were produced by the capital previously invested in agriculture. There is no diminution of national wealth; but there may be less wealth in the country available for consumption—a smaller fund, in fact, to distribute amongst the labourers, and therefore the labourers may temporarily suffer. The application of improved machinery and the construction of such works as railways will ultimately confer upon the labourers an advantage amply sufficient to compensate them for any temporary loss which they may suffer from the conversion of circulating into fixed capital. Railways and machinery have most powerfully stimulated the production of wealth, and a large amount of wealth has been produced by their aid which could never have been produced without them. Moreover, the capacity which exists in England for the accumulation of capital, quickly repairs any encroachment that is made upon her circulating capital; and therefore it is doubtful whether the labourers in this country have been even temporarily injured by the extensive use of machinery, and by the rapid development of our railway system.

Of Capital. 43

But although the labourers as a body are not injured by the conversion of circulating into fixed capital, through the extended use of machinery, yet particular classes of labourers often suffer a serious and permanent injury from this cause. For instance, a man may spend seven years in acquiring special skill in performing some process of manufacture. The possession of this skill may be regarded as an important property, the pecuniary value of which to its possessor can be estimated by the difference between his wages and those of an ordinary labourer. This difference may be so great that the skilled workman can earn 4l. a week, while the ordinary labourer can only earn 1l. One day a machine is introduced which performs this particular process at one-fourth of the cost at which it was performed by the skilled mechanic. He is, of course, at once superseded; his skill, which before was worth 3l. a week, ceases to have any value, and he may have to descend to the condition of the ordinary labourer. In such a case the loss to the labourer is just as real as if he had been suddenly deprived of an income of 150l. a year, or if an owner of a landed estate suddenly found its letting value diminished by three-fourths. Many striking examples might be easily given of the loss inflicted on artisans who possess some special skill which is superseded by the invention of a machine. It is, for instance, not generally known that the curve given to the brim of the best gentlemen's hats is done by hand, and requires so much skill, precision, and nicety, that those who are engaged in this particular kind of work often earn as much as 7l., or 8l. a week. A machine has already been invented which moulds brims sufficiently well for the cheaper sort of hats, and some improvement may very probably be introduced into this machine which will enable it to supersede the highly-paid labour above referred to. In this case a special class of men who can now earn 7l. or 8l. a week would have to descend to the position of ordinary workmen, and would probably not earn so much as half their former wages.

When, therefore, we hear of the opposition of certain classes of labourers to the introduction of machinery, we should remember that political economy affords no

BOOK I. CH. IV.

A permanent loss is sometimes suffered by special classes of workmen through the introduction of machinery. 44 Manual of Political Economy. BOOK I. CH. IV. justification for the off-hand way in which this opposition is often spoken of as irrational and unfounded. The reality of the loss which has to be borne by the labourers ought at once to be admitted; and as the loss is brought upon them by no fault of their own, the public ought at any rate to extend to them a kindly sympathy; sometimes the labourers might be induced, if calmly reasoned with, to relinquish a useless opposition to machinery: they not unfrequently increase the loss inflicted on them through the introduction of machinery by entering into a fruitless and costly struggle to resist its use. Probably the best way for the workmen to meet such a misfortune as that just described is to endeavour to find some other branch of industry, in which the kind of skill which they possess could be made to some extent available. The hand-loom weavers of Spitalfields, instead of clinging to an industry which has been superseded, and thus gradually sinking into deeper and deeper distress, would have done far better if they had sought employment in the silk-mills in the north of England.

1. This was written in 1863, since which time our own debt has been considerably reduced, and means have been adopted by the creation of terminable annuities to insure a still greater prospective reduction. The debts of nearly all European countries have been greatly increased; that of France alone amounted in 1886 to £841,000,000, or more than £100,000,000 in excess of the English National Debt at the same date. In 1904 the debts of France and England respectively were—France £1,038,379,843, England £796,736,491.