John Stuart Mill on Public Works Spending
December 17, 2006
The essay below was written by John Stuart Mill in the years 1829-1830, when Mill, born in 1806, was about 24 years old. It is rather long, but the first bit, in particular, does a nice job of demolishing the idea that public works spending is the high road to economic success. This may seem like it is beating a dead horse, but politicians do reach for this again and again — Japan in the 1990s, and China in the 1999-2000 period. While it is not too common that public works and higher taxes (to pay for them) are paired together conceptually, the fact is that higher taxes often follow a few years later as the government’s finances are rather negatively affected by the public works spending. “Public works” is a sort of catch-all phrase. In the US today, it is far more likely that the military becomes the recipient of a counter-recessionary spending binge.
The leading economists of Mill’s day weren’t much interested in the wondrous economic miracles produced by sloppy government spending. You’d never catch David Ricardo or Adam Smith nattering on about it. However, in the previous era, the Mercantilist writers loved this sort of stuff. Politicians of every era have latched onto the idea of greater government spending in a recession, but among intellectuals it was revived of course by John Maynard Keynes in the 1930s. Keynes had a strong sense that he was returning to Mercantilist thought.
Actually, it seems to me that the message that Keynes was trying to bring was that the government should be counter-recessionary. At the time, it was conventional wisdom to raise taxes on the onset of recession due to dropping tax revenues and resulting budget deficits. Of course this doesn’t help, and in the 1930s, made things much, much worse (the tax hikes of the period were enormous). Keynes argued that maybe a budget deficit was ok, and that maybe increased government spending could actually make things better. Keynes was rather deluded and confused in his arguments, unfortunately. The real point to make was not that spending money is the solution to all ills, but that raising taxes in a recession is a bad idea. What if Keynes had instead argued that lowering taxes in a recession was the thing to do? Makes sense to me. Government spending in a recession is not necessarily such a bad thing, and indeed it can be considered a sort of welfare program. However, as it is really just a welfare program, it doesn’t have the wondrous economy-boosting effects that many claim. It is very expensive, and its effects tend to peter out as soon as the money stops flowing.
Lastly, since we were trying to determine exactly what it is that economists think they are studying (I would claim that most academic economists can’t even get this one right), here is Mill’s opinion:
Political Economy, then, may be defined as follows; and the definition
seems to be complete:–
“The science which traces the laws of such of the phenomena of society
as arise from the combined operations of mankind for the production of
wealth, in so far as those phenomena are not modified by the pursuit of
any other object.”
Mill’s writing could use a bit more pizzazz — I suppose he was only 24 at the time — but the basic elements are there. The “combined operations of mankind for the production of wealth” is the important bit. In other words, the process of specialization, organization and trade in the production of the things we want, ie “wealth.” I like my definition better:
Economics is the study of how people make a living.
But that is mostly a stylistic change. I would say that my definition and Mill’s are essentially the same.
http://www.gutenberg.org/files/12004/12004-8.txt
ESSAY II.
OF THE INFLUENCE OF CONSUMPTION ON PRODUCTION.
Before the appearance of those great writers whose discoveries have
given to political economy its present comparatively scientific
character, the ideas universally entertained both by theorists and by
practical men, on the causes of national wealth, were grounded upon
certain general views, which almost all who have given any considerable
attention to the subject now justly hold to be completely erroneous.
Among the mistakes which were most pernicious in their direct
consequences, and tended in the greatest degree to prevent a just
conception of the objects of the science, or of the test to be applied
to the solution of the questions which it presents, was the immense
importance attached to consumption. The great end of legislation in
matters of national wealth, according to the prevalent opinion, was to
create consumers. A great and rapid consumption was what the producers,
of all classes and denominations, wanted, to enrich themselves and the
country. This object, under the varying names of an extensive demand, a
brisk circulation, a great expenditure of money, and sometimes _totidem
verbis_ a large consumption, was conceived to be the great condition of
prosperity.
It is not necessary, in the present state of the science, to contest
this doctrine in the most flagrantly absurd of its forms or of its
applications. The utility of a large government expenditure, for the
purpose of encouraging industry, is no longer maintained. Taxes are not
now esteemed to be “like the dews of heaven, which return again in
prolific showers.” It is no longer supposed that you benefit the
producer by taking his money, provided you give it to him again in
exchange for his goods. There is nothing which impresses a person of
reflection with a stronger sense of the shallowness of the political
reasonings of the last two centuries, than the general reception so long
given to a doctrine which, if it proves anything, proves that the more
you take from the pockets of the people to spend on your own pleasures,
the richer they grow; that the man who steals money out of a shop,
provided he expends it all again at the same shop, is a benefactor to
the tradesman whom he robs, and that the same operation, repeated
sufficiently often, would make the tradesman’s fortune.
In opposition to these palpable absurdities, it was triumphantly
established by political economists, that consumption never needs
encouragement. All which is produced is already consumed, either for the
purpose of reproduction or of enjoyment. The person who saves his income
is no less a consumer than he who spends it: he consumes it in a
different way; it supplies food and clothing to be consumed, tools and
materials to be used, by productive labourers. Consumption, therefore,
already takes place to the greatest extent which the amount of
production admits of; but, of the two kinds of consumption, reproductive
and unproductive, the former alone adds to the national wealth, the
latter impairs it. What is consumed for mere enjoyment, is gone; what is
consumed for reproduction, leaves commodities of equal value, commonly
with the addition of a profit. The usual effect of the attempts of
government to encourage consumption, is merely to prevent saving; that
is, to promote unproductive consumption at the expense of reproductive,
and diminish the national wealth by the very means which were intended
to increase it.
What a country wants to make it richer, is never consumption, but
production. Where there is the latter, we may be sure that there is no
want of the former. To produce, implies that the producer desires to
consume; why else should he give himself useless labour? He may not wish
to consume what he himself produces, but his motive for producing and
selling is the desire to buy. Therefore, if the producers generally
produce and sell more and more, they certainly also buy more and more.
Each may not want more of what he himself produces, but each wants more
of what some other produces; and, by producing what the other wants,
hopes to obtain what the other produces. There will never, therefore, be
a greater quantity produced, of commodities in general, than there are
consumers for. But there may be, and always are, abundance of persons
who have the inclination to become consumers of some commodity, but are
unable to satisfy their wish, because they have not the means of
producing either that, or anything to give in exchange for it. The
legislator, therefore, needs not give himself any concern about
consumption. There will always be consumption for everything which can
be produced, until the wants of all who possess the means of producing
are completely satisfied, and then production will not increase any
farther. The legislator has to look solely to two points: that no
obstacle shall exist to prevent those who have the means of producing,
from employing those means as they find most for their interest; and
that those who have not at present the means of producing, to the extent
of their desire to consume, shall have every facility afforded to their
acquiring the means, that, becoming producers, they may be enabled to
consume.
These general principles are now well understood by almost all who
profess to have studied the subject, and are disputed by few except
those who ostentatiously proclaim their contempt for such studies. We
touch upon the question, not in the hope of rendering these fundamental
truths clearer than they already are, but to perform a task, so useful
and needful, that it is to be wished it were oftener deemed part of the
business of those who direct their assaults against ancient prejudices,
–that of seeing that no scattered particles of important truth are
buried and lost in the ruins of exploded error. Every prejudice, which
has long and extensively prevailed among the educated and intelligent,
must certainly be borne out by some strong appearance of evidence; and
when it is found that the evidence does not prove the received
conclusion, it is of the highest importance to see what it does prove.
If this be thought not worth inquiring into, an error conformable to
appearances is often merely exchanged for an error contrary to
appearances; while, even if the result be truth, it is paradoxical
truth, and will have difficulty in obtaining credence while the false
appearances remain.
Let us therefore inquire into the nature of the appearances, which gave
rise to the belief that a great demand, a brisk circulation, a rapid
consumption (three equivalent expressions), are a cause of national
prosperity.
If every man produced for himself, or with his capital employed others
to produce, everything which he required, customers and their wants
would be a matter of profound indifference to him. He would be rich, if
he had produced and stored up a large supply of the articles which he
was likely to require; and poor, if he had stored up none at all, or not
enough to last until he could produce more.
The case, however, is different after the separation of employments. In
civilized society, a single producer confines himself to the production
of one commodity, or a small number of commodities; and his affluence
depends, not solely upon the quantity of his commodity which he has
produced and laid in store, but upon his success in finding purchasers
for that commodity.
It is true, therefore, of every particular producer or dealer, that
a great demand, a brisk circulation, a rapid consumption, of the
commodities which he sells at his shop or produces in his manufactory,
is important to him. The dealer whose shop is crowded with customers,
who can dispose of a product almost the very moment it is completed,
makes large profits, while his next neighbour, with an equal capital
but fewer customers, gains comparatively little.
It was natural that, in this case, as in a hundred others, the analogy
of an individual should be unduly applied to a nation: as it has been
concluded that a nation generally gains in wealth by the conquest of a
province, because an individual frequently does so by the acquisition of
an estate; and as, because an individual estimates his riches by the
quantity of money which he can command, it was long deemed an excellent
contrivance for enriching a country, to heap up artificially the
greatest possible quantity of the precious metals within it.
Let us examine, then, more closely than has usually been done, the case
from which the misleading analogy is drawn. Let us ascertain to what
extent the two cases actually resemble; what is the explanation of the
false appearance, and the real nature of the phenomenon which, being
seen indistinctly, has led to a false conclusion.
* * * * *
We shall propose for examination a very simple case, but the explanation
of which will suffice to clear up all other cases which fall within the
same principle. Suppose that a number of foreigners with large incomes
arrive in a country, and there expend those incomes: will this operation
be beneficial, as respects the national wealth, to the country which
receives these immigrants? Yes, say many political economists, if they
save any part of their incomes, and employ them reproductively; because
then an addition is made to the national capital, and the produce is a
clear increase of the national wealth. But if the foreigner expends all
his income unproductively, it is no benefit to the country, say they,
and for the following reason.
If the foreigner had his income remitted to him in bread and beef, coats
and shoes, and all the other articles which he was desirous to consume,
it would not be pretended that his eating, drinking, and wearing them,
on our shores rather than on his own, could be of any advantage to us in
point of wealth. Now, the case is not different if his income is
remitted to him in some one commodity, as, for instance, in money. For
whatever takes place afterwards, with a view to the supply of his wants,
is a mere exchange of equivalents; and it is impossible that a person
should ever be enriched by merely receiving an equal value in exchange
for an equal value.
When it is said that the purchases of the foreign consumer give
employment to capital which would otherwise yield no profit to its
owner, the same political economists reject this proposition as
involving the fallacy of what has been called a “general glut.” They
say, that the capital, which any person has chosen to produce and to
accumulate, can always find employment, since the fact that he has
accumulated it proves that he had an unsatisfied desire; and if he
cannot find anything to produce for the wants of other consumers, he can
for his own.
It is impossible to contest these propositions as thus stated. But there
is one consideration which clearly shews, that there is something more
in the matter than is here taken into the account; and this is, that the
above reasoning tends distinctly to prove, that it does a tradesman no
good to go into his shop and buy his goods. How can he be enriched? it
might be asked. He merely receives a certain value in money, for an
equivalent value in goods. Neither does this give employment to his
capital; for there never exists more capital than can find employment,
and if one person does not buy his goods another will; or if nobody
does, there is over-production in that business, he can remove his
capital, and find employment for it in another trade.
Every one sees the fallacy of this reasoning as applied to individual
producers. Every one knows that as applied to them it has not even the
semblance of plausibility; that the wealth of a producer does in a great
measure depend upon the number of his customers, and that in general
every additional purchaser does really add to his profits. If the
reasoning, which would be so absurd if applied to individuals, be
applicable to nations, the principle on which it rests must require much
explanation and elucidation.
Let us endeavour to analyse with precision the real nature of the
advantage which a producer derives from an addition to the number of his
customers.
For this purpose, it is necessary that we should premise a single
observation on the meaning of the word capital. It is usually defined,
the food, clothing, and other articles set aside for the consumption of
the labourer, together with the materials and instruments of production.
This definition appears to us peculiarly liable to misapprehension; and
much vagueness and some narrow views have, we conceive, occasionally
resulted from its being interpreted with too mechanical an adherence to
the literal meaning of the words.
The capital, whether of an individual or of a nation, consists, we
apprehend, of all matters possessing exchangeable value, which the
individual or the nation has in his or in its possession for the purpose
of reproduction, and not for the purpose of the owner’s unproductive
enjoyment. All unsold goods, therefore, constitute a part of the
national capital, and of the capital of the producer or dealer to whom
they belong. It is true that tools, materials, and the articles on which
the labourer is supported, are the only articles which are directly
subservient to production: and if I have a capital consisting of money,
or of goods in a warehouse, I can only employ them as means of
production in so far as they are capable of being exchanged for the
articles which conduce directly to that end. But the food, machinery,
&c, which will ultimately be purchased with the goods in my warehouse,
may at this moment not be in the country, may not be even in existence.
If, after having sold the goods, I hire labourers with the money, and
set them to work, I am surely employing capital, though the corn, which
in the form of bread those labourers may buy with the money, may be now
in warehouse at Dantzic, or perhaps not yet above ground.
Whatever, therefore, is destined to be employed reproductively, either
in its existing shape, or indirectly by a previous (or even subsequent)
exchange, is capital. Suppose that I have laid out all the money I
possess in wages and tools, and that the article I produce is just
completed: in the interval which elapses before I can sell the article,
realize the proceeds, and lay them out again in wages and tools, will it
be said that I have no capital? Certainly not: I have the same capital
as before, perhaps a greater, but it is locked up, as the expression is,
and not disposable.
When we have thus seen accurately what really constitutes capital, it
becomes obvious, that of the capital of a country, there is at all times
a very large proportion lying idle. The annual produce of a country is
never any thing approaching in magnitude to what it might be if all the
resources devoted to reproduction, if all the capital, in short, of the
country, were in full employment.
If every commodity on an average remained unsold for a length of time
equal to that required for its production, it is obvious that, at any
one time, no more than half the productive capital of the country would
be really performing the functions of capital. The two halves would
relieve one another, like the semichori in a Greek tragedy; or rather
the half which was in employment would be a fluctuating portion,
composed of varying parts; but the result would be, that each producer
would be able to produce every year only half as large a supply of
commodities, as he could produce if he were sure of selling them the
moment the production was completed.
This, or something like it, is however the habitual state, at every
instant, of a very large proportion of all the capitalists in the world.
The number of producers, or dealers, who turn over their capital, as the
expression is, in the shortest possible time, is very small. There are
few who have so rapid a sale for their wares, that all the goods which
their own capital, or the capital which they can borrow, enables them to
supply, are carried off as fast as they can be supplied. The majority
have not an _extent of business_, at all adequate to the amount of the
capital they dispose of. It is true that, in the communities in which
industry and commerce are practised with greatest success, the
contrivances of banking enable the possessor of a larger capital than he
can employ in his own business, to employ it productively and derive a
revenue from it notwithstanding. Yet even then, there is, of necessity,
a great quantity of capital which remains fixed in the shape of
implements, machinery, buildings, &c, whether it is only half employed,
or in complete employment: and every dealer keeps a stock in trade, to
be ready for a possible sudden demand, though he probably may not be
able to dispose of it for an indefinite period.
This perpetual non-employment of a large proportion of capital, is the
price we pay for the division of labour. The purchase is worth what it
costs; but the price is considerable.
Of the importance of the fact which has just been noticed there are
three signal proofs. One is, the large sum often given for the goodwill
of a particular business. Another is, the large rent which is paid for
shops in certain situations, near a great thoroughfare for example,
which have no advantage except that the occupier may expect a larger
body of customers, and be enabled to turn over his capital more quickly.
Another is, that in many trades, there are some dealers who sell
articles of an equal quality at a lower price than other dealers. Of
course, this is not a voluntary sacrifice of profits: they expect by the
consequent overflow of customers to turn over their capital more
quickly, and to be gainers by keeping the whole of their capital in more
constant employment, though on any given operation their gains are less.
The reasoning cited in the earlier part of this paper, to show the
uselessness of a mere purchaser or customer, for enriching a nation or
an individual, applies only to the case of dealers who have already as
much business as their capital admits of, and as rapid a sale for their
commodities as is possible. To such dealers an additional purchaser is
really of no use; for, if they are sure of selling all their commodities
the moment those commodities are on sale, it is of no consequence whether
they sell them to one person or to another. But it is questionable
whether there be any dealers in whose case this hypothesis is exactly
verified; and to the great majority it is not applicable at all. An
additional customer, to most dealers, is equivalent to an increase of
their productive capital. He enables them to convert a portion of their
capital which was lying idle (and which could never have become
productive in their hands until a customer was found) into wages and
instruments of production; and if we suppose that the commodity, unless
bought by him, would not have found a purchaser for a year after, then
all which a capital of that value can enable men to produce during a
year, is clear gain–gain to the dealer, or producer, and to the
labourers whom he will employ, and thus (if no one sustains any
corresponding loss) gain to the nation. The aggregate produce of the
country for the succeeding year is, therefore, increased; not by the
mere exchange, but by calling into activity a portion of the national
capital, which, had it not been for the exchange, would have remained
for some time longer unemployed.
Thus there are actually at all times producers and dealers, of all, or
nearly all classes, whose capital is lying partially idle, because they
have not found the means of fulfilling the condition which the division
of labour renders indispensable to the full employment of capital,–viz.,
that of exchanging their products with each other. If these persons
could find one another out, they could mutually relieve each other from
this disadvantage. Any two shopkeepers, in insufficient employment, who
agreed to deal at each other’s shops so long as they could there
purchase articles of as good a quality as elsewhere, and at as low a
price, would render the nation a service. It may be said that they must
previously have dealt, to the same amount, with some other dealers; but
this is erroneous, since they could only have obtained the means of
purchasing by being previously enabled to sell. By their compact, each
would gain a customer, who would call his capital into fuller employment;
each therefore would obtain an increased produce; and they would thus be
enabled to become better customers to each other than they could be to
third parties.
It is obvious that every dealer who has not business sufficient fully to
employ his capital (which is the case with all dealers when they commence
business, and with many to the end of their lives), is in this
predicament simply for want of some one with whom to exchange his
commodities; and as there are such persons to about the same degree
probably in all trades, it is evident that if these persons sought one
another out, they have their remedy in their own hands, and by each
other’s assistance might bring their capital into more full employment.
We are now qualified to define the exact nature of the benefit which a
producer or dealer derives from the acquisition of a new customer. It is
as follows:–
1. If any part of his own capital was locked up in the form of unsold
goods, producing (for a longer period or a shorter) nothing at all;
a portion of this is called into greater activity, and becomes more
constantly productive. But to this we must add some further advantages.
2. If the additional demand exceeds what can be supplied by setting at
liberty the capital which exists in the state of unsold goods; and if
the dealer has additional resources, which were productively invested
(in the public funds, for instance), but not in his own trade; he is
enabled to obtain, on a portion of these, not mere interest, but profit,
and so to gain that difference between the rate of profit and the rate
of interest, which may be considered as “wages of superintendance.”
3. If all the dealer’s capital is employed in his own trade, and no part
of it locked up as unsold goods, the new demand affords him additional
encouragement to save, by enabling his savings to yield him not merely
interest, but profit; and if he does not choose to save (or until he
shall have saved), it enables him to carry on an additional business
with borrowed capital, and so gain the difference between interest and
profit, or, in other words, to receive wages of superintendance on a
larger amount of capital.
This, it will be found, is a complete account of all the gains which a
dealer in any commodity can derive from an accession to the number of
those who deal with him: and it is evident to every one, that these
advantages are real and important, and that they are the cause which
induces a dealer of any kind to desire an increase of his business.
It follows from these premises, that the arrival of a new unproductive
consumer (living on his own means) in any place, be that place a
village, a town, or an entire country, is beneficial to that place, if
it causes to any of the dealers of the place any of the advantages above
enumerated, without withdrawing an equal advantage of the same kind from
any other dealer of the same place.
This accordingly is the test by which we must try all such questions,
and by which the propriety of the analogical argument, from dealing with
a tradesman to dealing with a nation, must be decided.
Let us take, for instance, as our example, Paris, which is much
frequented by strangers from various parts of the world, who, as
sojourners there, live unproductively upon their means. Let us consider
whether the presence of these persons is beneficial, in an _industrial_
point of view, to Paris.
We exclude from the consideration that portion of the strangers’ incomes
which they pay to natives as direct remuneration for service, or labour
of any description. This is obviously beneficial to the country. An
increase in the funds expended in employing labour, whether that labour
be productive or unproductive, tends equally to raise wages. The
condition of the whole labouring class is, so far, benefited. It is true
that the labourers thus employed by sojourners are probably, in part or
altogether, withdrawn from productive employment. But this is far from
being an evil; for either the situation of the labouring classes is
improved, which is far more than an equivalent for a diminution in mere
production, or the rise of wages acts as a stimulus to population, and
then the number of productive labourers becomes as great as before.
To this we may add, that what the sojourners pay as wages of labour or
service (whether constant or casual), though expended unproductively by
the first possessor, may, when it passes into the hands of the receivers,
be by them saved, and invested in a productive employment. If so, a direct
addition is made to the national capital.
All this is obvious, and is sufficiently allowed by political economists;
who have invariably set apart the gains of all persons coming under the
class of domestic servants, as real advantages arising to a place from
the residence there of an increased number of unproductive consumers.
We have only to examine whether the purchases of commodities by these
unproductive consumers, confer the same kind of benefit upon the
village, town, or nation, which is bestowed upon a particular tradesman
by dealing at his shop.
Now it is obvious that the sojourners, on their arrival, confer the
benefit in question upon some dealers, who did not enjoy it before. They
purchase their food, and many other articles, from the dealers in the
place. They, therefore, call the capital of some dealers, which was
locked up in unsold goods, into more active employment. They encourage
them to save, and enable them to receive wages of superintendance upon a
larger amount of capital. These effects being undeniable, the question
is, whether the presence of the sojourners deprives any others of the
Paris dealers of a similar advantage.
It will be seen that it does; and nothing will then remain but a
comparison of the amounts.
It is obvious to all who reflect (and was shown in the paper which
precedes this) that the remittances to persons who expend their incomes
in foreign countries are, after a slight passage of the precious metals,
defrayed in commodities: and that the result commonly is, an increase of
exports and a diminution of imports, until the latter fall short of the
former by the amount of the remittances.
The arrival, therefore, of the strangers (say from England), while it
creates at Paris a market for commodities equivalent in value to their
funds, displaces in the market other commodities to an equal value. To
the extent of the increase of exports from England into France in the
way of remittance, it introduces additional commodities which, by their
cheapness, displace others formerly produced in that country. To the
extent of the diminution of imports into England from France,
commodities which existed or which were habitually produced in that
country are deprived of a market, or can only find one at a price not
sufficient to defray the cost.
It must, therefore, be a matter of mere accident, if by arriving in a
place, the new unproductive consumer causes any net advantage to its
industry, of the kind which we are now examining. Not to mention that
this, like any other change in the channels of trade, may render useless
a portion of fixed capital, and so far injure the national wealth.
A distinction, however, must here be made.
The place to which the new unproductive consumers have come, may be a
town or village, as well as a country. If a town or village, it may
either be or not be a place having an export trade.
If the place had no previous trade except with the immediate
neighbourhood, there are no exports and imports, by the new arrangement
of which, the remittance can be made. There is no capital, formerly
employed in manufacturing for the foreign market, which is now brought
into less full employment.
Yet the remittance evidently is still made in commodities, but in this
case without displacing any which were produced before. To shew this, it
is necessary to make the following remarks.
The reason why towns exist, is that _ceteris paribus_ it is convenient,
in order to save cost of carriage, that the production of commodities
should take place as far as practicable in the immediate vicinity of the
consumer. Capital finds its way so easily from town to country and from
country to town, that the amount of capital in the town will be regulated
wholly by the amount which can be employed there more conveniently than
elsewhere. Consequently the capital of a place will be such as is
sufficient
1st. To produce all commodities which from local circumstances can be
produced there at less cost than elsewhere: and if this be the case to
any great extent, it will be an exporting town. When we say _produced_,
we may add, or _stored_.
2nd. To produce and retail the commodities which are consumed by the
inhabitants of the town, and the place of whose production is in other
respects a matter of indifference. To the inhabitants of the town must
be added such dwellers in the adjoining country, as are nearer to that
place than to any other equally well furnished market.
Now, if new unproductive consumers resort to the place, it is clear that
for the latter of these two purposes, more capital will be required than
before. Consequently, if less is not required for the former purpose,
more capital will establish itself at the place.
Until this additional capital has arrived, the producers and dealers
already on the spot will enjoy great advantages. Every particle of their
own capital will be called into the most active employment. What their
capital does not enable them to supply, will be got from others at a
distance, who cannot supply it on such favourable terms; consequently
they will be in the predicament of possessing a partial monopoly
–receiving for every thing a price regulated by a higher cost of
production than they are compelled to pay. They also, being in possession
of the market, will be enabled to make a large portion of the new capital
pass through their hands, and thus to earn wages of superintendance upon
it.
If, indeed, the place from whence the strangers came, previously traded
with that where they have taken up their abode, the effect of their
arrival is, that the exports of the town will diminish, and that it will
be supplied from abroad with something which it previously produced at
home. In this way an amount of capital will be set free equal to that
required, and there will be no increase on the whole. The removal of the
court from London to Birmingham would not necessarily, though it would
probably [6], increase the amount of capital in the latter place. The
afflux of money to Birmingham, and its efflux from London, would render
it cheaper to make some articles in London for Birmingham consumption;
and to make others in London for home consumption, which were formerly
brought from Birmingham.
But instead of Birmingham, an exporting town, suppose a village, or a
town which only produced and retailed for itself and its immediate
vicinity. The remittances must come thither in the shape of money; and
though the money would not remain, but would be sent away in exchange
for commodities, it would, however, first pass through the hands of the
producers and dealers in the place, and would by them be exported in
exchange for the articles which they require–viz. the materials, tools,
and subsistence necessary for the increased production now required of
them, and articles of foreign luxury for their own increased unproductive
consumption. These articles would not displace any formerly made in the
place, but on the contrary, would forward the production of more.
Hence we may consider the following propositions as established:
1. The expenditure of absentees (the case of domestic servants excepted,)
is not necessarily any loss to the _country_ which they leave, or gain to
the _country_ which they resort to (save in the manner shown in Essay I.):
for almost every _country_ habitually exports and imports to a much
greater value than the incomes of its absentees, or of the foreign
sojourners within it.
2. But sojourners often do much good to the _town_ or village which they
resort to, and absentees harm to that which they leave. The capital of
the petty tradesman in a small town near an absentee’s estate, is
deprived of the market for which it is conveniently situated, and must
resort to another to which other capitals lie nearer, and where it is
consequently outbid, and gains less; obtaining only the same price, with
greater expenses. But this evil would be equally occasioned, if, instead
of going abroad, the absentee had removed to his own capital city.
If the tradesman could, in the latter case, remove to the metropolis, or
in the former, employ himself in producing increased exports, or in
producing for home consumption articles now no longer imported, each in
the place most convenient for that operation; he would not be a loser,
though the place which he was obliged to leave might be said to lose.
Paris undoubtedly gains much by the sojourn of foreigners, while the
counteracting loss by diminution of exports from France is suffered by
the great trading and manufacturing towns, Rouen, Bordeaux, Lyons, &c,
which also suffer the principal part of the loss by importation of
articles previously produced at home. The capital thus set free, finds
its most convenient seat to be Paris, since the business to which it
must turn is the production of articles to be unproductively consumed by
the sojourners.
The great trading towns of France would undoubtedly be more flourishing,
if France were not frequented by foreigners.
Rome and Naples are perhaps purely benefited by the foreigners
sojourning there: for they have so little external trade, that their
case may resemble that of the village in our hypothesis.
Absenteeism, therefore, (except as shown in the first Essay,) is a
local, not a national evil; and the resort of foreigners, in so far as
they purchase for unproductive consumption, is not, in any commercial
country, a national, though it may be a local good.
From the considerations which we have now adduced, it is obvious what
is meant by such phrases as a _brisk demand_, and a rapid circulation.
There is a brisk demand and a rapid circulation, when goods, generally
speaking, are sold as fast as they can be produced. There is slackness,
on the contrary, and stagnation, when goods, which have been produced,
remain for a long time unsold. In the former case, the capital which has
been locked up in production is disengaged as soon as the production is
completed; and can be immediately employed in further production. In the
latter case, a large portion of the productive capital of the country is
lying in temporary inactivity.
From what has been already said, it is obvious that periods of “brisk
demand” are also the periods of greatest production: the national
capital is never called into full employment but at those periods. This,
however, is no reason for desiring such times; it is not desirable that
the whole capital of the country should be in full employment. For, the
calculations of producers and traders being of necessity imperfect,
there are always some commodities which are more or less in excess, as
there are always some which are in deficiency. If, therefore, the whole
truth were known, there would always be some classes of producers
contracting, not extending, their operations. If _all_ are endeavouring
to extend them, it is a certain proof that some general delusion is
afloat. The commonest cause of such delusion is some general, or very
extensive, rise of prices (whether caused by speculation or by the
currency) which persuades all dealers that they are growing rich. And
hence, an increase of production really takes place during the progress
of depreciation, as long as the existence of depreciation is not
suspected; and it is this which gives to the fallacies of the currency
school, principally represented by Mr. Attwood, all the little
plausibility they possess. But when the delusion vanishes and the truth
is disclosed, those whose commodities are relatively in excess must
diminish their production or be ruined: and if during the high prices
they have built mills and erected machinery, they will be likely to
repent at leisure.
In the present state of the commercial world, mercantile transactions
being carried on upon an immense scale, but the remote causes of
fluctuations in prices being very little understood, so that
unreasonable hopes and unreasonable fears alternately rule with
tyrannical sway over the minds of a majority of the mercantile public;
general eagerness to buy and general reluctance to buy, succeed one
another in a manner more or less marked, at brief intervals. Except
during short periods of transition, there is almost always either great
briskness of business or great stagnation; either the principal
producers of almost all the leading articles of industry have as many
orders as they can possibly execute, or the dealers in almost all
commodities have their warehouses full of unsold goods.
In this last ease, it is commonly said that there is a general
superabundance; and as those economists who have contested the
possibility of general superabundance, would none of them deny the
possibility or even the frequent occurrence of the phenomenon which we
have just noticed, it would seem incumbent on them to show, that the
expression to which they object is not applicable to a state of things
in which all or most commodities remain unsold, in the same sense in
which there is said to be a superabundance of any one commodity when it
remains in the warehouses of dealers for want of a market.
This is merely a question of naming, but an important one, as it seems
to us that much apparent difference of opinion has been produced by a
mere difference in the mode of describing the same facts, and that
persons who at bottom were perfectly agreed, have considered each other
as guilty of gross error, and sometimes oven misrepresentation, on this
subject.
In order to afford the explanations, with which it is necessary to take
the doctrine of the impossibility of an excess of all commodities, we
must advert for a moment to the argument by which this impossibility is
commonly maintained.
There can never, it is said, be a want of buyers for all commodities;
because whoever offers a commodity for sale, desires to obtain a
commodity in exchange for it, and is therefore a buyer by the mere fact
of his being a seller. The sellers and the buyers, for all commodities
taken together, must, by the metaphysical necessity of the case, be an
exact equipoise to each other; and if there be more sellers than buyers
of one thing, there must be more buyers than sellers for another.
This argument is evidently founded on the supposition of a state of
barter; and, on that supposition, it is perfectly incontestable. When
two persons perform an act of barter, each of them is at once a seller
and a buyer. He cannot sell without buying. Unless he chooses to buy
some other person’s commodity, he does not sell his own.
If, however, we suppose that money is used, these propositions cease to
be exactly true. It must be admitted that no person desires money for
its own sake, (unless some very rare cases of misers be an exception,)
and that he who sells his commodity, receiving money in exchange, does
so with the intention of buying with that same money some other commodity.
Interchange by means of money is therefore, as has been often observed,
ultimately nothing but barter. But there is this difference–that in the
case of barter, the selling and the buying are simultaneously confounded
in one operation; you sell what you have, and buy what you want, by one
indivisible act, and you cannot do the one without doing the other. Now
the effect of the employment of money, and even the utility of it, is,
that it enables this one act of interchange to be divided into two
separate acts or operations; one of which may be performed now, and the
other a year hence, or whenever it shall be most convenient. Although he
who sells, really sells only to buy, he needs not buy at the same moment
when he sells; and he does not therefore necessarily add to the
_immediate_ demand for one commodity when he adds to the supply of
another. The buying and selling being now separated, it may very well
occur, that there may be, at some given time, a very general inclination
to sell with as little delay as possible, accompanied with an equally
general inclination to defer all purchases as long as possible. This is
always actually the case, in those periods which are described as
periods of general excess. And no one, after sufficient explanation,
will contest the possibility of general excess, in this sense of the
word. The state of things which we have just described, and which is of
no uncommon occurrence, amounts to it.
For when there is a general anxiety to sell, and a general
disinclination to buy, commodities of all kinds remain for a long time
unsold, and those which find an immediate market, do so at a very low
price. If it be said that when all commodities fall in price, the fall
is of no consequence, since mere money price is not material while the
relative value of all commodities remains the same, we answer that this
would be true if the low prices were to last for ever. But as it is
certain that prices will rise again sooner or later, the person who is
obliged by necessity to sell his commodity at a low money price is
really a sufferer, the money he receives sinking shortly to its ordinary
value. Every person, therefore, delays selling if he can, keeping his
capital unproductive in the mean time, and sustaining the consequent
loss of interest. There is stagnation to those who are not obliged to
sell, and distress to those who are.
It is true that this state can be only temporary, and must even be
succeeded by a reaction of corresponding violence, since those who have
sold without buying will certainly buy at last, and there will then be
more buyers than sellers. But although the general over-supply is of
necessity only temporary, this is no more than may be said of every
partial over-supply. An overstocked state of the market is always
temporary, and is generally followed by a more than common briskness of
demand.
In order to render the argument for the impossibility of an excess of
all commodities applicable to the case in which a circulating medium is
employed, money must itself be considered as a commodity. It must,
undoubtedly, be admitted that there cannot be an excess of all other
commodities, and an excess of money at the same time.
But those who have, at periods such as we have described, affirmed that
there was an excess of all commodities, never pretended that money was
one of these commodities; they held that there was not an excess, but
a deficiency of the circulating medium. What they called a general
superabundance, was not a superabundance of commodities relatively to
commodities, but a superabundance of all commodities relatively to
money. What it amounted to was, that persons in general, at that
particular time, from a general expectation of being called upon to meet
sudden demands, liked better to possess money than any other commodity.
Money, consequently, was in request, and all other commodities were in
comparative disrepute. In extreme cases, money is collected in masses,
and hoarded; in the milder cases, people merely defer parting with their
money, or coming under any new engagements to part with it. But the
result is, that all commodities fall in price, or become unsaleable.
When this happens to one single commodity, there is said to be a
superabundance of that commodity; and if that be a proper expression,
there would seem to be in the nature of the case no particular
impropriety in saying that there is a superabundance of all or most
commodities, when all or most of them are in this same predicament.
It is, however, of the utmost importance to observe that excess of all
commodities, in the only sense in which it is possible, means only a
temporary fall in their value relatively to money. To suppose that the
markets for all commodities could, in any other sense than this, be
overstocked, involves the absurdity that commodities may fall in value
relatively to themselves; or that, of two commodities, each can fall
relatively to the other, A becoming equivalent to B-_x_, and B to A-_x_,
at the same time. And it is, perhaps, a sufficient reason for not using
phrases of this description, that they suggest the idea of excessive
production. A want of market for one article may arise from excessive
production of that article; but when commodities in general become
unsaleable, it is from a very different cause; there cannot be excessive
production of commodities in general.
The argument against the possibility of general over-production is quite
conclusive, so far as it applies to the doctrine that a country may
accumulate capital too fast; that produce in general may, by increasing
faster than the demand for it, reduce all producers to distress. This
proposition, strange to say, was almost a received doctrine as lately as
thirty years ago; and the merit of those who have exploded it is much
greater than might be inferred from the extreme obviousness of its
absurdity when it is stated in its native simplicity. It is true that if
all the wants of all the inhabitants of a country were fully satisfied,
no further capital could find useful employment; but, in that case, none
would be accumulated. So long as there remain any persons not possessed,
we do not say of subsistence, but of the most refined luxuries, and who
would work to possess them, there is employment for capital; and if the
commodities which these persons want are not produced and placed at
their disposal, it can only be because capital does not exist, disposable
for the purpose of employing, if not any other labourers, those very
labourers themselves, in producing the articles for their own consumption.
Nothing can be more chimerical than the fear that the accumulation of
capital should produce poverty and not wealth, or that it will ever take
place too fast for its own end. Nothing is more true than that it is
produce which constitutes the market for produce, and that every increase
of production, if distributed without miscalculation among all kinds of
produce in the proportion which private interest would dictate, creates,
or rather constitutes, its own demand.
This is the truth which the deniers of general over-production have
seized and enforced; nor is it pretended that anything has been added
to it, or subtracted from it, in the present disquisition. But it is
thought that those who receive the doctrine accompanied with the
explanations which we have given, will understand, more clearly than
before, what is, and what is not, implied in it; and will see that, when
properly understood, it in no way contradicts those obvious facts which
are universally known and admitted to be not only of possible, but of
actual and even frequent occurrence. The doctrine in question only
appears a paradox, because it has usually been so expressed as
apparently to contradict these well-known facts; which, however, were
equally well known to the authors of the doctrine, who, therefore, can
only have adopted from inadvertence any form of expression which could
to a candid person appear inconsistent with it. The essentials of the
doctrine are preserved when it is allowed that there cannot be permanent
excess of production, or of accumulation; though it be at the same time
admitted, that as there may be a temporary excess of any one article
considered separately, so may there of commodities generally, not in
consequence of over-production, but of a want of commercial confidence.
NOTE:
[6] Probably; because most articles of an ornamental description beingstill required from the same makers, these makers, with their capital,
would probably follow their customers, Besides, from place to place
within the same country, most persons will lather change their
habitation than their employment. But the moving on this score would be
reciprocal.
