Encyclopaedia Britannica > Volume 19, PHY-PRO

POLITICAL ECONOMY
374
proof, and in the portable and pregnant formulae which
were so convenient in argument, and gave a prompt, if
often a more apparent than real, solution of difficult
problems. Whatever there was of false or narrow in the
fundamental positions of Smith had been in a great degree
corrected by his practical sense and strong instinct for
reality, but was brought out in its full dimensions and
even exaggerated in the abstract theorems of Ricardo and
his followers.
The dangers inherent in his method were aggravated by
the extreme looseness of his phraseology. Senior pro¬
nounces him “ the most incorrect writer who ever attained
philosophical eminence.” His most ardent admirers find
him fluctuating and uncertain in the use of words, and
generally trace his errors to a confusion between the
ordinary employment of a term and some special applica¬
tion of it which he has himself devised.
The most complete exposition of his system is to be
found in his Principles of Political Economy and Taxation
(1817). This work is not a complete treatise on the
science, but a rather loosely connected series of disquisi¬
tions on value and price, rent, wages and profits, taxes,
trade, money and banking. Yet, though the connexion of
the parts-is loose, the same fundamental ideas recur con¬
tinually, and determine the character of the entire scheme.
The principal problem to which he addresses himself in
this work is that of distribution,—that is to say, the pro¬
portions of the whole produce of the country which will be
allotted to the proprietor of land, to the capitalist, and to
the labourer. And it is important to observe that it is
especially the variations in their respective portions which
take place in the progress of society that he professes to
study,—one of the most unhistorical of writers thus in¬
dicating a sense of the necessity of a doctrine of economic
dynamics—a doctrine which, from his point of view, it
was impossible to supply.
The principle which he puts first in order, and which is indeed the
key to the whole, is this—that the exchange value of any commodity
the supply of which can be increased at will is regulated, under a
regime of free competition, by the labour necessary for its production.
Similar propositions are to be found in the Wealth of Nations, not
to speak of earlier English writings. Smith had said that, “ in the
early and rude state of society which precedes both the accumula¬
tion of stock and the appropriation of land, the proportion between
the quantities of labour necessary for acquiring different objects
seems to be the only circumstance which can afford any rule for
exchanging them with one another.” But he wavers in his con¬
ception, and presents as the measure of value sometimes the
quantity of labour necessary for the production of the object, some¬
times the quantity of labour which the object would command in
the market, which are identical only for a given time and place.
The theorem requires correction for a developed social system by
the introduction of the consideration of capital, and takes the form
in which it is elsewhere quoted from Malthus by Ricardo, that the
real price of a commodity “depends on the greater or less quantity
of capital and labour which must be employed to produce it. ” (The
expression “quantity of capital” is lax, the element of time being
omitted, but the meaning is obvious). Ricardo, however, constantly
takes no notice of capital, mentioning labonr alone in his statement
of this principle, and seeks to justify his practice by treating
capital as “ accumulated labour ”; but this artificial way of viewing
the facts obscures the nature of the co-operation of capital in produc¬
tion, and by keeping the necessity of this co-operation out of sight
has encouraged some socialistic errors. Ricardo does not sufficiently
distinguish between the cause or determinant and the measure of
value ; nor does he carry back the principle of cost of production
as regulator of value to its foundation in the effect of that cost on
the limitation of supply. It is the “ natural price ” of a commodity
that is fixed by the theorem we have stated ; the market price will
be subject to accidental and temporary variations from this standard,
depending on changes in demand and supply; but the price will,
permanently and in the long run, depend on cost of production de¬
fined as above. On this basis Ricardo goes on to explain the laws
according to which the produce of the land and the labour of the
country is distributed amongst the several classes which take part
in production.
The theory of rent, with which be begins, though commonly
associated with his name, and though it certainly forms the most
vital part of his general economic scheme, was not really his, nor
did he lay claim to it. He distinctly states in the preface to the
Principles, that “in 1815 Mr Malthus, in his Inquiry into the
Nature and Progress of Rent, and a fellow of University College,
Oxford, in his Essay on the Application of Capital to Land, presented
to the world, nearly at the same moment, the true doctrine of
rent.” The second writer here referred to was Sir Edward West,
afterwards a judge of the supreme court of Bombay. Still earlier
than the time of Malthus and West, as M'Culloch has pointed out,
this doctrine had been clearly conceived and fully stated by Dr
James Anderson in his Enquiry into the Nature of Corn-Laws,
published at Edinburgh in 1777. That this tract was unknown to
Malthus and West we have every reason to believe; but the theor}1-
is certainly as distinctly enunciated and as satisfactorily supported
in it as in their treatises ; and the whole way in which it is put
forward by Anderson strikingly resembles the form in which it is
presented by Ricardo.
The essence of the theory is that rent, being the price paid by the
cultivator to the owner of land for the use of its productive powers,
is equal to the excess of the price of the produce of the land over
the cost of production on that land. With the increase of popula¬
tion, and therefore of demand for food, inferior soils will be taken
into cultivation ; and the price of the entire supply necessary for
the community will be regulated by the cost of production of that
portion of the supply which is produced at the greatest expense.
But for the land which will barely repay the cost of cultivation no
rent will be paid. Hence the rent of any quality of land will be
equal to the difference between the cost of production on that land
and the cost of production of that produce which is raised at the
greatest expense.
The doctrine is perhaps most easily apprehended by means of the
shpposition here made of the coexistence in a country of a series of
soils of different degrees of fertility which are successively taken
into cultivation as population increases. But it would be an error
to believe, though Ricardo sometimes seems to imply it, that such
difference is a necessary condition of the existence of rent. If all
the land of a country were of equal fertility, still if it were appro¬
priated, and if the price of the produce were more than an equiva¬
lent for the labour and capital applied to its production, rent would
be paid. This imaginary case, however, after using it to clear our
conceptions, we may for the future leave out of account.
The price of. produce being, as we have said, regulated by the
cost of production of that which pays no rent, it is evident that
“corn is not high because a rent is paid, but a rent is paid because
corn is high,” and that “no reduction would take place in the price
of corn although landlords should forego the whole of their rent. ”
Rent is, in fact, no determining element of price ; it is paid, indeed,
out of the price, but the price would be the same if no rent were
paid, and the whole price were retained by the cultivator.
It has often been doubted whether or not Adam Smith held this
theory of rent. Sometimes he uses language which seems to imply
it, and states propositions which, if developed, would infallibly
lead to it. Thus he says, in a passage already quoted, “ such parts
only of the produce of land can commonly be brought to market of
which the ordinary price is sufficient to replace the stock which
must be employed in bringing them thither, together with its
ordinary profits. If the ordinary price is more than this, the
surplus part of it will naturally go to the rent of land. If it is
not more, though the commodity can be brought to market, it can
afford no rent to the landlord. Whether the price is or is not
more depends on the demand.” Again, in Smith’s application of
these considerations to mines, “the whole principle of rent,” Ricardo
tells us, “is admirably and perspicuously explained.” But he had
formed the opinion that there is in fact no land which does not
afford a rent to the landlord ; and, strangely, he seems not to have
seen that this appearance might arise from the aggregation into an
economic whole of parcels of land which can and others which
cannot pay rent. The truth, indeed, is that the fact, if it were a
fact, that all the land in a country pays rent would be irrelevant
as an argument against the Andersonian theory, for it is the same
thing in substance if there be any capital employed on land already
cultivated which yields a return no more than equal to ordinary
profits. Such last-employed capital cannot afford rent at the exist¬
ing rate of profit, unless the price of produce should rise.
The belief which some have entertained that Smith, notwith¬
standing some vague or inaccurate expressions, really held the
Andersonian doctrine, can scarcely be maintained when we
remember that Hume, writing to him after having read for the first
time the Wealth of Nations, whilst expressing general agreement
with his opinions, said (apparently with reference to bk. I. chap. vii.),
“ I cannot think that the rent of farms makes any part of the price
of the produce, but that the price is determined altogether by the
quantity and the demand.” It is further noteworthy that a state¬
ment of the theory of rent is given in the same volume, published
in 1777, which contains Anderson’s polemic against Smith’s objec¬
tions to a bounty on the exportation of corn ; this volume can
hardly have escaped Smith’s notice, yet neither by its contents nor