Principles of Economics

A. Marshall

• Publisher: Palgrave Macmillan
• Year: 2013
• ISBN:
  9781137375261
• Topic: Economics
• Subtopic: Economic Policy
• Index: Economics

Alfred Marshall, Principles of Economics (1890) – Founder of Modern (Neo-classical) Economics. His book Principles of Economics was the dominant textbook in economics for a long time and it is considered to be his seminal work.

BOOK VI

THE DISTRIBUTION OF THE NATIONAL INCOME

CHAPTER I

PRELIMINARY SURVEY OF DISTRIBUTION

VI, I, 1.

§ 1. THE keynote of this Book is in the fact that free human beings are not brought up to their work on the same principles as a machine, a horse, or a slave. If they were, there would be very little difference between the distribution and the exchange side of value; for every agent of production would reap a return adequate to cover its own expenses of production with wear-and-tear, etc.; at all events after allowance had been made for casual failures to adjust supply to demand. But as it is, our growing power over nature makes her yield an ever larger surplus above necessaries; and this is not absorbed by an unlimited increase of the population. There remain therefore the questions:—What are the general causes which govern the distribution of this surplus among the people? What part is played by conventional necessaries, i.e. the Standard of Comfort? What by the influence which methods of consumption and of living generally exert on efficiency; by wants and activities, i.e. by the Standard of Life? What by the many-sided action of the principle of substitution, and by the struggle for survival between hand-workers and brain-workers of different classes and grades? What by the power which the use of capital gives to those in whose hands it is? What share of the general flow is turned to remunerate those who work (including here the undertaking of ventures) and “wait,” as contrasted with those who work and consume at once the fruits of their endeavours? An attempt is made to give a broad answer to those and some similar questions.

The drift of Book VI. as a whole

We shall begin a preliminary survey of the subject by noting how French and English writers a century ago represented value as governed almost wholly by cost of production, demand taking a subordinate place. Next we shall observe how near to the truth these results would be in a stationary state; and what corrections need to be introduced in order to bring these results into harmony with the actual conditions of life and work: and thus the remainder of Chapter I will be given mainly to the demand for labour.

Drift of Chapter I.

VI, I, 2.

In Chapter II we shall first consider its supply under modern conditions; and thence we shall turn to a general view of the causes which fix the broad lines of distribution of the national income between labour, and the owners of capital and land. In this rapid survey we shall pass by unnoticed many details: to fill in some of these is the task of the remainder of the Book; but others must stand over for a later Volume.

Drift of Chapter II

§ 2. The simplest account of the causes which determine the distribution of the national income is that given by the French economists who just preceded Adam Smith; and it is based upon the peculiar circumstances of France in the latter half of last century. The taxes, and other exactions levied from the French peasant, were then limited only by his ability to pay; and few of the labouring classes were far from starvation. So the Economists or Physiocrats, as they were called, assumed for the sake of simplicity, that there was a natural law of population according to which the wages of labour were kept at starvation limit.¹ They did not suppose that this was true of the whole working population, but the exceptions were so few, that they thought that the general impression given by their assumption was true: somewhat in the same way as it is well to begin an account of the shape of the earth, by saying that it is an oblate spheroid, although a few mountains do project as much as a thousandth part of its radius beyond the general level.

The Physiocrats assumed, in accordance with facts near at hand, that wages were at their lowest possible level,

Again, they knew that the rate of interest in Europe had fallen during the five preceding centuries, in consequence of the fact that “economy had in general prevailed over luxury.” But they were impressed very much by the sensitiveness of capital, and the quickness with which it evaded the oppressions of the tax-gatherer by retiring from his grasp; and they therefore concluded that there was no great violence in the supposition that if its profits were reduced below what they then were, capital would speedily be consumed or migrate. Accordingly they assumed, again for the sake of simplicity, that there was something like a natural, or necessary rate of profit, corresponding in some measure to the natural rate of wages; that if the current rate exceeded this necessary level, capital would grow rapidly, till it forced down the rate of profit to that level; and that, if the current rate went below that level, capital would shrink quickly, and the rate would be forced upwards again. They thought that, wages and profits being thus fixed by natural laws, the natural value of everything was governed simply as the sum of wages and profits required to remunerate the producers.¹

and that much the same was true of the interest on Capital.

VI, I, 2.

Adam Smith worked out this conclusion more fully than the Physiocrats did; though it was left for Ricardo to make clear that the labour and capital needed for production must be estimated at the margin of cultivation, so as to avoid the element of rent. But Adam Smith saw also that labour and capital were not at the verge of starvation in England, as they were in France. In England the wages of a great part of the working classes were sufficient to allow much more than the mere necessaries of existence; and capital had too rich and safe a field of employment there to be likely to go out of existence, or to emigrate. So when he is carefully weighing his words, his use of the terms “the natural rate of wages,” and “the natural rate of profit,” has not that sharp definition and fixedness which it had in the mouths of the Physiocrats; and he goes a good way towards explaining how they are determined by the ever-fluctuating conditions of demand and supply. He even insists that the liberal reward of labour “increases the industry of the common people”; that “a plentiful subsistence increases the bodily strength of the labourer; and the comfortable hope of bettering his condition, and of ending his days perhaps in ease and plenty, animates him to exert that strength to the utmost. Where wages are high, accordingly, we shall always find the workman more active, diligent and expeditious, than where they are low; in England, for example, than in Scotland; in the neighbourhood of great towns than in remote country places.”¹ And yet he sometimes falls back into the old way of speaking, and thus makes careless readers suppose that he believes the mean level of the wages of labour to be fixed by an iron law at the bare necessaries of life.

These rigid assumptions were partially relaxed by Adam Smith,

VI, I, 2.

Malthus again, in his admirable survey of the course of wages in England from the thirteenth to the eighteenth centuries, shows how their mean level oscillated from century to century, falling sometimes down to about half a peck of corn a day, and rising sometimes up to a peck and a half or even, in the fifteenth century, to about two pecks. But although he observes that “an inferior mode of living may be a cause as well as a consequence of poverty,” he traces this effect almost exclusively to the consequent increase of numbers; he does not anticipate the stress which economists of our own generation lay on the influence which habits of living exercise on the efficiency, and therefore on the earning power of the labourer.¹

and by Malthus.

Ricardo’s language is even more unguarded than that of Adam Smith and Malthus. It is true, indeed, that he says distinctly²:— “It is not to be understood that the natural price of labour estimated in food and necessaries is absolutely fixed and constant … It essentially depends on the habits and customs of the people.” But, having said this once, he does not take the trouble to repeat it constantly; and most of his readers forget that he says it. In the course of his argument he frequently adopts a mode of speaking similar to that of Turgot and the Physiocrats³; and seems to imply that the tendency of population to increase rapidly as soon as wages rise above the bare necessaries of life, causes wages to be fixed by “a natural law” to the level of these bare necessaries. This law has been called, especially in Germany, Ricardo’s “iron” or “brazen” law: many German socialists believe that this law is in operation now even in the western world; and that it will continue to be so, as long as the plan on which production is organized remains “capitalistic” or “individualistic”; and they claim Ricardo as an authority on their side.⁴

Ricardo appeared to hold the so-called “iron law of wages”; but in fact he regarded wages as largely governed by a mutable standard of life.

VI, I, 2.

In fact, however, Ricardo was not only aware that the necessary or natural limit of wages was fixed by no iron law, but is determined by the local conditions and habits of each place and time: he was further keenly sensitive to the importance of a higher “standard of living,” and called on the friends of humanity to exert themselves to encourage the growth of a resolve among the working classes not to allow their wages to fall anywhere near the bare necessaries of life.¹

The persistency with which many writers continue to attribute to him a belief in the “iron law” can be accounted for only by his delight “in imagining strong cases,” and his habit of not repeating a hint, which he had once given, that he was omitting for the sake of simplicity the conditions and limitations that were needed to make his results applicable to real life.²

Mill did not make any great advance in the theory of wages beyond his predecessors, in spite of the care with which he set himself to emphasize the distinctly human element in economics. He, however, followed Malthus in dwelling on those lessons of history which show that, if a fall of wages caused the labouring classes to lower their standard of comfort “the injury done to them will be permanent, and their deteriorated condition will become a new minimum tending to perpetuate itself as the more ample minimum did before.”³

Mill also insisted on the progressive deterioration caused by unduly low wages.

VI, I, 3.

But it was only in the last generation that a careful study was begun to be made of the effects that high wages have in increasing the efficiency not only of those who receive them, but also of their children and grandchildren. In this matter the lead has been taken by Walker and other American economists; and the application of the comparative method of study to the industrial problems of different countries of the old and new worlds is forcing constantly more and more attention to the fact that highly paid labour is generally efficient and therefore not dear labour; a fact which, though it is more full of hope for the future of the human race than any other that is known to us, will be found to exercise a very complicating influence on the theory of distribution.

But the last generation was the first to study carefully the influence of wages on efficiency.

It has now become certain that the problem of distribution is much more difficult than it was thought to be by earlier economists, and that no solution of it which claims to be simple can be true. Most of the old attempts to give an easy answer to it, were really answers to imaginary questions that might have arisen in other worlds than ours, in which the conditions of life were very simple. The work done in answering these questions was not wasted. For a very difficult problem can best be solved by being broken up into pieces: and each of these simple questions contained a part of the great and difficult problem which we have to solve. Let us profit by this experience and work our way by successive steps in the remainder of this chapter towards understanding the general causes which govern the demand for labour and capital in real life.¹

The problem is difficult: simple illustrations are needed.

§ 3. Let us begin by studying the influence of demand on the earnings of labour, drawn from an imaginary world in which everyone owns the capital that aids him in his labour; so that the problem of the relations of capital and labour do not arise in it. That is, let us suppose but little capital to be used; while everyone owns whatever capital he does use, and the gifts of nature are so abundant that they are free and unappropriated. Let us suppose, further, that everyone is not only of equal capacity, but of equal willingness to work, and does in fact work equally hard: also that all work is unskilled—or rather unspecialized in this sense, that if any two people were to change occupations, each would do as much and as good work as the other had done. Lastly, let us suppose that everyone produces things ready for sale without the aid of others, and that he himself disposes of them to their ultimate consumers: so that the demand for everything is direct.

First, all supposed industrially equal and interchangeable, population stationary;

VI, I, 4.

In this case the problem of value is very simple. Things exchange for one another in proportion to the labour spent in producing them. If the supply of any one thing runs short, it may for a little time sell for more than its normal price: it may exchange for things the production of which had required more labour than it had: but, if so, people will at once leave other work to produce it, and in a very short time its value will fall to the normal level. There may be slight temporary disturbances, but as a ...