Admitting that the proportion which one of the two factors receives can be increased only if the other is lessened, the problem is to discover which of the two, capital or labour, has the bigger portion. It really seems as if it were labour, for Ricardo speaks of another law of profits, namely, “the tendency of profits to a minimum.” Here is another thesis which has had a long career in the history of economics, but what are the reasons that can be adduced in support of it? The natural tendency of profits, then, is to fall; “for in the progress of society and wealth the additional quantity of food required is obtained by the sacrifice of more labour.” It is determined by the same cause as determined rent—the system is a solid piece of work at any rate.
But how does the cultivation of inferior land affect the rate of profits? We have already seen how the worker’s share, the minimum necessary for keeping body and soul together, goes to swell the high price of corn.[352] But the manufacturer cannot transfer the cost of high wages to the consumer, for the rate of wages has no effect on prices. (Labour has, but wages have none.) As a consequence, the capitalist’s share must be correspondingly reduced. We must remember that the workman gains nothing by the high rate of wages, for his consumption of food is limited by nature, but this does not hinder the capitalist losing a great deal by it.
And so there must come a time when the necessary wage will have absorbed everything and nothing will remain for profit. There will be a new era in history, for every incentive to accumulate capital will disappear with the extinction of profit. Capital will cease growing, no new lands will be cultivated, and population will be brought to a sudden standstill.[353] The stationary state with its melancholy vistas will be entered upon. Mill has described it in such eloquent terms that we are almost reconciled to the prospect. But it could hardly have been a pleasant matter for Ricardo, who was primarily a financier and had but little concern with philosophy. He was very much attached to his prophecies, and there is a delicate piece of irony in the thought that the tendency of profits towards a minimum should have been first noted by this great representative of capitalism. At the same time he felt a little reassured when he thought of the opposing forces which might check its downward trend and arrest the progress of rent. In both instances the best corrective seemed to lie in the freedom of foreign trade.
The general lines of distribution are presented to us in a strikingly simple fashion. The demonstration is neater even than the famous Tableau économique, and it has the further merit of being nearer the actual facts as they appeared in Ricardo’s day, for they are no longer quite the same. It may be represented by means of a diagram consisting of three lines.
At the top is an ascending line representing rent—the share of Mother Earth. The proprietor’s rent reveals a double increase both of money and kind, for as population and its needs grow it requires an increasing quantity of corn at an increased price. Still, the high price cannot be indefinitely prolonged, for beyond a certain point a high price of corn would arrest the growth of population and at the same time the growth of rent; then it would no longer be necessary to cultivate new lands.
In the middle is a horizontal line representing wages—labour’s share. The real wages of labour remain stationary, for it simply receives the quantity of corn necessary to keep it alive. It is true that as the corn is gradually becoming dearer the worker’s nominal wages increase, but with no real benefit to him.
Below this is a descending line representing profits—capital’s share.[354] It shows a downward trend for the simple reason that it finds itself squeezed between the proprietor’s share, which tends to increase, and the labourer’s, which is stationary. The capitalist is brought to our notice in the guise of an English farmer who is obliged to raise his servants’ wages as the corn becomes dearer, but who gains nothing by this rise because the extra revenue is taken by the proprietor in the form of higher rent. But profits cannot fall indefinitely, for beyond a certain point it would involve an end to the employment of old capital and the formation of new capital. This would hinder the cultivation of new lands, and would arrest the high price of corn and lower rent.
3. The Balance of Trade Theory and the Quantity Theory of Money
Such are the more characteristic of Ricardo’s doctrines—at any rate, those that left the deepest impression upon his successors and caused the greatest stir among his contemporaries. There are other doctrines besides which, regarded as contributions to the science, are much more important and more definite; but just because they figured almost directly in the category of universally accepted truths whose validity and authorship have never been questioned they have contributed less to his fame. Such are his theories of international trade and banking, where the theorist becomes linked to a first-rate practical genius. Here at any rate there is no note of pessimism and no suggestion of conflicting interests. On the contrary, he was able to point out that “under a system of perfectly free commerce the pursuit of individual advantage is admirably connected with the universal good of the whole.”
In the matter of international trade he showed himself a more resolute Free Trader than either Smith or the Physiocrats. It seemed to him that the only way of arresting the terrible progress of rent and of checking the rising price of corn and the downward tendency of profits was by the freest importation of foreign corn.[355]
In addition to this twofold argument in favour of Free Trade, Ricardo brings forward another which is of considerable importance even at the present time. This argument is based upon the advantages which accrue from the territorial division of labour. “By stimulating industry, by rewarding ingenuity, and by using most efficaciously the peculiar powers bestowed by Nature, it distributes labour most effectively and most economically.”
It may be worth while remarking that his illustrious contemporary Malthus remained more or less of a Protectionist.[356] It might seem strange that Malthus, continually haunted as he was by the spectre of famine, should refuse to welcome importation. But his point of view was doubtless largely that of the modern agricultural Protectionist, who believes that the surest way of preserving a country from famine is not to abandon its agriculture to the throes of foreign competition, but, on the contrary, to strengthen and develop the home industry by securing it a sufficiently high price for its products. We must also remember that Malthus’s theory of rent differed somewhat from Ricardo’s, and that he was not so violently opposed to State intervention.[357]
But Ricardo’s principal contribution to the science was his discovery of the laws governing the movements of commodities and the counter-movements of money from one place to another, and the admirable demonstration which he has given us of this remarkable ebb and flow.
As soon as the balance of commerce becomes unfavourable to France, let us say—that is, as soon as importation exceeds exportation say by £1,000,000—money is exported to pay for this excessive importation. Money becomes scarce, its value rises, and prices fall. But a fall in price will check foreign importation and will encourage exportation, so that imports will show signs of falling off while exports will grow. Money will no longer be sent abroad, and the current will begin to run the other way, until the £1,000,000 sent abroad is returned again. Moreover, the £1,000,000 sent abroad will cause a movement in the opposite direction—superabundance and a depreciation in the value of money, high prices, a premium on importation and a check upon exportation. Accordingly economic forces on both sides will conspire to bring back the balance of commerce to a position of equilibrium—that is, to that position where each country will possess just the quantity of money that it needs.
It might be pointed out, on the other hand, that this somewhat complicated mechanism can only operate very slowly, and that considerable time must elapse before the prices of goods begin to respond to the change in the quantity of money. But as a matter of fact it is not necessary to wait until this phenomenon becomes established, for another striking feature precedes it and announces its approach so to speak, and this is, as Smith had already noted, a change in the value of bills drawn on foreign countries. The foreign exchanges are so sensitive that the slightest rise is enough to stimulate exportation and to check importation.
Accordingly money seldom leaves a country, or only leaves it