Part 44

As the wages of the labourer are the remuneration of labour, so the profits of the capitalist are properly the remuneration of abstinence. They are what he gains by forbearing to consume his capital for his own uses and allowing it to be consumed by productive labourers for their uses. Of these gains, however, a part only is properly an equivalent for the use of the capital itself; namely, so much as a solvent person would be willing to pay for the loan of it. This, as everybody knows, is called interest. What a person expects to gain who superintends the employment of his own capital is always more than this. The rate of profit greatly exceeds the rate of interest. The surplus is partly compensation for risk and partly remuneration for the devotion of his time and labour. Thus, the three parts into which profit may be regarded as resolving itself, may be described, respectively, as interest, insurance, and wages of superintendence.

The requisites of production being labour, capital, and natural agents, the only person besides the labourer and the capitalist whose consent is necessary to production is he who possesses exclusive power over some natural agent. The land is the principal natural agent capable of being so appropriated, and the consideration paid for its use is called rent.

It is at once evident that rent is the effect of a monopoly. If all the land of the country belonged to one person he could fix the rent at his pleasure. The whole people would be dependent on his will for the necessaries of life. But even when monopolised--in the sense of being limited in quantity--land will command a price only if it exists in less quantity than the demand, and no land ever pays rent unless, in point of fertility and situation, it belongs to those superior kinds which exist in less quantity than the demand.

Any land yields just so much more than the ordinary profits of stock as it yields more than what is returned by the worst land in cultivation. The surplus is what is paid as rent to the landlord. The standard of rent, therefore, is the excess of the produce of any land beyond what would be returned to the same capital if employed on the worst land in cultivation, or, generally, in the least advantageous circumstances.

III.--Of Exchange and Value

Of the two great departments of political economy, the production of wealth and its distribution, value has to do with the latter alone. The conditions and laws of production would be unaltered if the arrangements of society did not depend on, or admit of, exchange.

Value always means in political economy value in exchange, the command which its possession gives over purchasable commodities in general; whereas, by the price of a thing is understood its value in money.

That a thing may have value in exchange two conditions are necessary. It must be of some use--that is, it must conduce to some purpose, and secondly, there must be some difficulty in its attainment. This difficulty is of three kinds. It may consist in an absolute limitation of supply, as in the case of wines which can be grown only in peculiar circumstances of soil, climate, and exposure; in the labour and expense requisite to produce the commodity; or, thirdly, the limitation of the quantity which can be produced at a given cost, to which class agricultural produce belongs, increased production beyond a certain limit entailing increased cost.

When the production of a commodity is the effect of labour and expenditure, there is a minimum value, which is the essential condition of its permanent production, and must be sufficient to repay the cost of production, and, besides, the ordinary expectation of profit. This may be called the necessary value. When the commodity can be made in indefinite quantity, this necessary value is also the maximum which the producers can expect. If it is such that it brings a rate of profit higher than is customary, capital rushes in to share in this extra gain, and, by increasing the supply, reduces the value. Accordingly, by the operation of supply and demand the values of things are made to conform in the long run to the cost of production.

The introduction of money does not interfere with the operation of any of the laws of value. Things which by barter would exchange for one another will, if sold for money, sell for an equal amount of it, and so will exchange for one another, still through the process of exchanging them will consist of two operations instead of one. Money is a commodity, and its value is determined like that of other commodities, temporarily by demand and supply and permanently by cost of production.

Credit, as a substitute for money, is but a transfer of capital from hand to hand, generally from persons unable to employ it to hands more competent to employ it efficiently in production. Credit is not a productive power in itself, though without it the productive powers already existing could not be brought into complete employment.

In international trade we find that the law that permanent value is proportioned to cost of production does not hold good between commodities produced in distant places as it does in those produced in adjacent places.

Between distant places, and especially between different countries, profits may continue different, because persons do not usually remove themselves or their capital to a distant place without a very strong motive. If capital removed to remote parts of the world as readily, and for as small an inducement, as it moves to another quarter of the same town, profits would be equivalent all over the world, and all things would be produced in the places where the same labour and capital would produce them in greatest quantity and of best quality. A tendency may even now be observed towards such a state of things; capital is becoming more and more cosmopolitan.

It is not a difference in the absolute cost of production which determines the interchange between distant places, but a difference in the comparative cost. We may often by trading with foreigners obtain their commodities at a smaller expense of labour and capital than they cost to the foreigners themselves. The bargain is advantageous to the foreigner because the commodity which he receives in exchange, though it has cost us less, would probably have cost him more.

The value of a commodity brought from a distant place does not depend on the cost of production in the place from whence it comes, but on the cost of its acquisition in that place; which in the case of an imported article means the cost of production of the thing which is exported to pay for it. In other words, the values of foreign commodities depend on the terms of international exchange, which, in turn, depend on supply and demand.

It may be established that when two countries trade together in two commodities the exchange value of these commodities relatively to each other will adjust itself to the inclinations and circumstances of the consumers on both sides in such manner that the quantities required by each country of the article which it imports from its neighbour shall be exactly sufficient to pay for one another, a law which holds of any greater number of commodities. International values depend also on the means of production available in each country for the supply of foreign markets, but the practical result is little affected thereby.

IV.--On the Influence of Government

One of the most disputed questions in political science and in practical statesmanship relates to the proper limits of the functions and agency of governments. It may be agreed that they fall into two classes: functions which are either inseparable from the idea of government or are exercised habitually by all governments; and those respecting which it has been considered questionable whether governments should exercise them or not. The former may be termed the necessary, the latter the optional, functions of government.

It may readily be shown that the admitted functions of government embrace a much wider field than can easily be included within the ring-fence of any restrictive definition, and that it is hardly possible to find any ground of justification common to them all, except the comprehensive one of general expediency; nor to limit the interference of government by any universal rule, save the simple and vague one that it should never be admitted but when the case of expediency is strong.

A most important consideration in viewing the economical effects arising from performance of necessary government functions is the means adopted by government to raise the revenue which is the condition of their existence.

The qualities desirable in a system of taxation have been embodied by Adam Smith in four maxims or principles, which may be said to have become classical:

(1) The subjects of every state ought to contribute to the support of the government as nearly as possible in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.

(2) The tax which each individual has to pay ought to be certain, and not arbitrary. A great degree of inequality is not nearly so great an evil as a small degree of uncertainty.

(3) Every tax ought to be levied at the time or in the manner in which it is most likely to be convenient for the contributor to pay it. Taxes upon such consumable goods as are articles of luxury are all finally paid by the consumer, and generally in a manner that is very convenient to him.

(4) Every tax ought to be so contrived as to take out and keep out of the pockets of the people as little as possible over and above what it brings into the public treasury.

Taxes on commodities may be considered in the following way. Suppose that a commodity is capable of being made by two different processes. It is the interest of the community that of the two methods producers should adopt that which produces the best article at the lowest price. Suppose, however, that a tax is laid on one of the processes, and no tax at all, or one of lesser amount, on the other. If the tax falls, as it is, of course, intended to do, upon the process which the producers would have adopted, it creates an artificial motive for preferring the untaxed process though the inferior of the two. If, therefore, it has any effect at all it causes the commodity to be produced of worse quality, or at a greater expense of labour; it causes so much of the labour of the community to be wasted, and the capital employed in supporting and remunerating the labour to be expended as uselessly as if it were spent in hiring men to dig holes and fill them up again. The loss falls on the consumers, though the capital of the country is also eventually diminished by the diminution of their means of saving, and in some degree of their inducements to save.

Taxes on foreign trade are of two kinds: taxes on imports and on exports. On the first aspect of the matter it would seem that both these taxes are paid by the consumers of the commodity. The true state of the case, however, is much more complicated.

By taxing exports we may draw into our coffers, at the expense of foreigners, not only the whole tax, but more than the tax; in other cases we shall gain exactly the tax; in others less than the tax. In this last case, a part of the tax is borne by ourselves, possibly the whole, even more than the whole.