Manual of Political Economy/Book 1/Chapter 8

by Henry Fawcett

CHAPTER VIII.

ON THE INCREASE OF CAPITAL.

Increased production of wealth implies an increase of capital.IN the preceding chapter we have remarked upon some of the more prominent conditions which determine the increased production of wealth, as far as it depends upon an increase of the cultivated land, and upon an increase in the number of the labouring population. But larger production also requires an increase of capital. It must be evident from the remarks we have made upon capital, that an increase of capital is as essential to a larger production of wealth as an increase of land and labour. If land, for instance, is more highly cultivated, additional capital must be applied to it: and new land cannot be brought under cultivation without the application of capital to it. If more labourers are employed, a larger fund, in the form of circulating capital, must be devoted to pay their wages. Improvements in the various processes of industry cannot be introduced without the expenditure of capital. Machinery, warehouses, manufactories, railroads, ships, all such industrial appliances as these, exhibit the various modes in which the fixed capital of a nation assists her industry.

and, therefore, increased saving.It has been previously asserted as a fundamental proposition, that capital, whether fixed or circulating, is the result of saving. Increased capital, therefore, implies increased saving; and hence the laws may be determined which regulate the increase of capital by considering the causes upon which depends the increased saving or accumulation of wealth. There are two principal motives which induce men to save; and these are, first, a prudent foresight with regard to the future; and, secondly, a desire to make wealth by an advantageous investment. which may be due to two motives—foresight and desire for profit.The first motive is by far the more powerful. To its action has been due the greater part of all wealth which has been saved. But the second motive is the chief cause of fluctuations in the amount of a nation's capital. Whether the amount of capital at any time existing in the country is above or below the average is almost entirely determined by the profit which it may be thought capital will realise. This profit may be estimated by the current rate of interest. But in political economy, as in many other sciences, the causes which produce the disturbing fluctuations require a more careful investigation than those causes whose action is more constant and more undeviating. The earth when revolving in its orbit is acted on by a great number of forces. It is attracted by every body in the planetary system, yet these forces combined are almost immeasurably inferior to the force of attraction which is exerted by the sun. Most important mathematical investigations, however, depend upon the action of these disturbing forces. Similarly, in political economy, the effects of the more constant causes can be readily estimated; but causes more varying in their action introduce fluctuations and disturbances which must be investigated and classified by the scientific principles of political economy.

Importance of the desire to accumulate wealth.As civilisation advances the desire to accumulate wealth increases, and foresight for the future becomes more general. The more men's intellectual and moral faculties are developed, the more careful will they be to make a reasonable provision for the future. The Jesuit missionaries, who in the eighteenth century formed a settlement in Paraguay, found the great difficulty they had to contend with was the utter recklessness of the people. The missionaries gave them seed. They knew that this seed would, if sown, in a few months yield them a plentiful supply of food, yet they could not be restrained from eating the seed instead of sowing it; the smallest present enjoyment was by them preferred to the greatest prospective advantage. People in such a condition can be very little superior to the more intelligent animals, whose hereditary instincts induce them to provide against danger which they may have to encounter. Birds build nests which are most perfectly adapted to protect their young; beavers construct their habitations on a plan so admirable that it seems almost to rival the skill of man; and even dogs collect a store of food to which they will resort when pressed by hunger.

Its strength in England.In England the desire to accumulate wealth acts with great force amongst certain classes. It is impossible accurately to define the causes which regulate the amount saved by any individual, but it may be stated generally that in England each class of society has a recognised standard of living which involves a certain expenditure, and the whole of an individuals income which is in excess of this expenditure is usually saved and invested. The amount which is saved is, therefore, partly dependent at any particular time upon the material prosperity of the country. If activity of trade or any other such circumstance should increase the incomes of any particular class, there would be a larger fund from which savings might be made, and more would be saved. Habit has such a powerful influence in determining expenditure, that it often happens that a man does not spend more, although his income may be greatly increased. Any circumstance, therefore, which tends to augment the wealth of the nation, will induce increased saving.

The amount of saving is partly determined by the cost of the articles consumed.It may also be remarked that the amount of an individual's expenditure is to some extent determined by the cost of the commodities which he consumes. The consumption of some articles diminishes in proportion to the rise which may take place in their price. La Madras, for instance, when the salt duties were several years ago raised 18 per cent., the result was an increase in the revenue of only 12 per cent. This proved that the consumption of salt was diminished by the increase in its price. It was found that when the sugar duties were raised beyond a certain amount, they did not produce a larger revenue. When the price of sugar was high, it was much more sparingly used. Such articles, however, as tea and bread, are, in this country, almost universally regarded as necessaries of life; and the quantity of tea and bread which is consumed by those classes who accumulate the capital of the country, is not materially affected by a variation in the price of these commodities. If, therefore, bread and tea decline in price, the household expenses of the middle and upper classes will be diminished, and a larger portion of their income will remain to be saved as capital. We mention this as applying particularly to the middle and upper classes, because there is no doubt that our labouring population would gladly consume a greater quantity, even of the ordinary necessaries of life, had they the means of purchasing them. If the price of tea is reduced one-half, the labourers will probably continue to spend upon this article as much as they had previously done; they would spend less upon bread if its price was reduced, but the amount which they thus saved would not, as a general rule, be invested by the labourers as capital, but would be applied to satisfy some of the many wants and desires of life, which they had not previously the means of gratifying. The labourers therefore are benefited in two distinct ways, by the cheapening of any article of ordinary consumption. They have, in the first place, to pay less for it when they purchase it, and, secondly, the cheapening of such a product has a tendency to augment the capital of the country, by enabling the middle and upper classes to increase their savings, and the labourers will receive higher wages if capital is increased.

Causes of fluctuations in the amount of saving.We have, however, before remarked, that the fluctuations in the amount of capital which is saved, depend upon the nature of the opportunities which present themselves for investment. If the profits which can be realised upon capital increase, a greater inducement is offered to save, and a larger amount is sure to be saved. From such a source, either directly or indirectly, any large increase of capital which may be required is mainly supplied. At any particular time there is a certain interest upon capital which people expect, and with less they will not be satisfied. But it will perhaps be said, what does a capitalist do with his capital? If he wants 3 1/2 per cent, interest and can only obtain 3 per cent., he will not squander it because he is not satisfied with so low a rate of interest; will, therefore, less wealth be saved? Less, no doubt, will be saved, because a low rate of interest offers less inducement to save; the most Foreign investments.important point, however, to be borne in mind is that a much smaller portion of the wealth which is saved will be invested as capital in our own country, when the rate of interest is low. England, far more than any other country, offers a striking example of the vast amount of capital which the people are ready to invest, if a favourable opportunity presents itself. When the government requires a loan, many millions are at once subscribed, without encroaching in the slightest degree upon either the circulating or fixed capital of the country. The loan is not altogether supplied from capital which was previously unemployed, but England has vast sums invested in almost every civilised country. Magnificent as are the tokens of England's wealth which surround us on every side, yet our manufactories, our railroads, our mercantile marine will not give us an adequate idea of England's riches, unless we remember that there are few countries either in the new or the old world that are not our debtors. Russia, Turkey, India, Australia, Canada, the United States, the Republics of South America, all have satisfied their state necessities, by loans supplied from English capital. But it is not only foreign governments who borrow from us; a vast number of foreign speculations have been supported by English capital. A considerable number of railroads throughout the world have been made by English capital; the Grand Trunk Railway of Canada has absorbed 15,000,000l. of English capital. The railways, irrigation works, and roads of India have been constructed by English capital, and some of the richest mines in South America have been worked by English companies. Consequently only a portion of the wealth which is annually accumulated in England is retained to be invested in this country. If, therefore, England requires a greater amount of capital to extend any branch of trade or to carry out any public work, she can supply an amount which is practically unlimited. If, for instance, there were such an expansion in our cotton manufacture, that 100,000,000l. of additional capital was required, it would be readily obtained, by placing a check upon the investments of English capital abroad. The amount of capital, therefore, which is applied to the production of wealth in this country, does not depend so much upon the amount which is saved, as upon the proportion retained by the country itself of all the wealth which is saved. The relative amount of English capital which is invested at home and abroad is regulated by many considerations, the chief of which is the rate of interest which can be obtained at home compared to that which can be obtained in foreign countries. Economical condition of foreign countries as to the requisites of production.We have explained that the English government may raise large loans without diminishing the capital invested in English industry, the loans being chiefly derived from capital which would otherwise have been embarked in foreign investments. Yet it must be borne in mind that this remark does not apply to countries from which little capital is exported. France was congratulated at the close of her war with Germany upon the ease with which she raised successive loans, amounting to many hundred millions of pounds, to defray the expenses of the war and to pay the German indemnity. A portion of these vast loans was probably supplied from money which had been hoarded; but a great portion of them was no doubt obtained from capital which would otherwise have been re-employed in the production of wealth. The war had caused, over a great part of France, an almost entire cessation of production. Hence, as the war proceeded and as trade declined, there was a large amount of capital which had previously been employed in productive industry ready at hand to be lent to the government to be consumed in war. Even after the war was concluded, the indemnity of 200,000,000l. which she had to pay to Germany withdrew a large amount of capital from France which might have been employed in reviving the various branches of industry which had suffered so much during the war.

India has abundance of land and labour, but little capital.It is important to bear in mind that, with regard to the conditions on which depend the increased production of wealth, England, in many respects, offers a direct antithesis to other countries; thus, she possesses an almost unlimited capital, but has very little fertile land at the present time uncultivated. In India the chief requisite for the increased production of wealth is increase of capital; whereas in newly settled countries which possess an abundant supply of unoccupied fertile land, a larger production of wealth chiefly depends upon an increase of labour and capital. It will be readily perceived that, contrasting England and India, the increased production of wealth will take place under very different conditions in the two countries. In England capital is readily supplied to assist an increased production of wealth. The labourers' wages will probably rise when the industry of the country is active. There may, however, be one drawback to the benefit which they thus derive. As the area of new soil which England can bring under cultivation is so limited, the price of many articles of food will rise, in consequence of the larger consumption of a more numerous and better paid labouring class. India, in her present condition, has a most abundant supply of labour, and the productiveness of her land might be greatly increased if more capital were applied to its cultivation; but at the present time there seems little chance of this increased application of capital taking place unless more capital is obtained from other countries.

Thus England wants cheap food, and India capital.It is, evident, from the previous remarks, that in England the great requisite for the increased production of wealth is a large supply of cheap food. This cheap food may be obtained either by importation, by agricultural improvements, or by extending the area of land cultivated in England. Industry cannot be for any length of time impeded in this country by any want of labour and capital, but in India an increase of capital, both fixed and circulating, is most essential to a larger production of wealth. Ages of anarchy have produced a wide-spread feeling of insecurity throughout India. Individuals have been afraid to exhibit their wealth, because it would tempt the rapacity of those who had the power to pillage their weaker neighbours. A great part of the wealth saved was hoarded, and it consequently performed none of the functions of capital. The owners of property felt that it was only secure when it could be concealed. If they employed labourers, they could not feel certain that they would be able to retain the results of the labourers' industry. Hence we can reasonably anticipate one most beneficent result from England's Useful results to India of her connexion with England.rule in India; for her power, in course of time, may make every class in India feel that the rights of property are respected. Nothing will more tend to increase the capital, and hence the wealth of the country; for when security is given to property there is a great inducement to save, and the wealth which is saved, instead of being hoarded, will be usefully applied as capital to assist the further production of wealth. India is at the present time, in some degree, deriving this advantage from England's rule. But admitting this advantage, it cannot be too carefully borne in mind by those who are responsible for the government of India, that the Indian people ought not to be compelled to pay too high a price for it. Our administration being necessarily expensive, in consequence of the high remuneration which Europeans receive in order to induce them to reside in the country, every care ought to be taken to prevent its being more costly than it need be.

Although there are so many points of diversity between England and India, yet, as previously remarked, there are other countries whose economic condition differs most essentially from either that of England or India. The main requisite for the increased production of wealth is, in India, an increase of capital, and in England, an increase of land, or, in other words, an increased supply of cheap food. In the West Indies there is abundance of land and capital, but little labour.In the West India islands, however, there is an abundance of land and capital, but a great scarcity of labour. The decline in the prosperity of these islands is, in an economic sense, most instructive. Previous to the emancipation of the slaves, the West Indies possessed all the three requisites of production; their soil was fertile, it was owned by English proprietors, who readily supplied all the capital that was required, and labour was, of course, never deficient when slaves could be freely imported, and when there was an abundance of money with which to purchase them. But the abolition of slavery not only freed the slave, but effectually checked the importation of labour. Property in man was declared to be illegal, and therefore no one would resort to the expense of importing labour when he had not the power to retain the services of the labourers he imported. The emancipated negroes of the West Indies are unwilling to do as much work as when labour was extorted from them. Degraded by their bondage, their wants are few, and easily satisfied; the rich fertility of the tropics supplies them with almost all the food they require, with the exertion of very little labour. Why should they, therefore, constantly toil? They have few tastes to gratify, and few wants to satisfy. No one will labour for labour's sake; the emancipated negroes are well fed almost by the spontaneous bounty of nature, and they are therefore perfectly contented to live a lazy life of repose. Consequences of this deficiency.The consequence of this is that the production of wealth has almost ceased in many parts of the West Indies. The land is as fertile as it was before; English proprietors would only be too glad to supply capital if they could find the labourers; but this labour is not forthcoming; the emancipated negroes are unwilling to work and the climate is unsuited to European labourers; the production of wealth cannot proceed, and estates, which before 1833 were worth 10,000l. a year, are now little more than a useless burden to their owners. It is thus quite evident that it is impossible for the West Indies to become more prosperous without a larger supply of labour. How is such a supply of labour to be obtained? In the first place, labourers may be imported; secondly, the population of the islands may increase, and the people may become more desirous to labour, as their wants become gradually enlarged. Difficulty of supplying it by importing labour.Let us first consider the importation of labour. Labourers may pass from one country to another entirely of their own accord. Large numbers of Chinese have emigrated to Australia because they could earn higher wages in Australia than in China. They have also emigrated in large numbers to the United States. Australia never took any steps to encourage their coming; their presence is, in fact, so much objected to, that an extreme measure has been passed, and a poll-tax of 10l. has been imposed on every Chinaman who lands; and, moreover, in New South Wales and Victoria the owners of vessels are subject to heavy penalties if they bring more than one Chinese to every hundred tons of ship burden. If the Chinese felt that equal advantages were to be secured in the West Indies, no doubt great numbers would emigrate to those islands, and thus supply the labour which is so much needed. It is, however, a singular fact, that the English, the Germans, the Scandinavians and the Chinese are the only people who freely emigrate at the present day.^[1] Now it is quite impossible for Europeans to work in a sugar plantation under a tropical sun; if, therefore, the Chinese will not resort in the same way to the West Indies as they have to California and Australia, the West Indies cannot depend upon a supply of labour from voluntary emigration. Such emigration as that of the coolies cannot be regarded as voluntary. A government votes a certain sum of money to fit out ships which sail to the Malay Archipelago. The natives are canvassed to emigrate, their expenses are paid, and they are promised work when they arrive at their destination. Large numbers of coolies have in this manner been imported to the Mauritius and the West Indies, but the traffic is liable to be abused, and the coolies have occasionally endured on their voyage sufferings which seem to revive some of the horrors of the slave-trade. The coolie-traffic can never be carried on by private enterprise, because, If an individual imported coolies, he would have no power to compel them to work for him in preference to another person. If such a power were permitted, there would cease to be any real distinction between the coolie-traffic and slavery.

Other means of remedying the evil.The negroes of the West Indies are, as we before remarked, unwilling to work; and the only hope of making the people more industrious, is to stimulate in them new desires and new wants; they will not, of course, work as long as they are content to obtain little else than the food which the islands supply in abundance. If they become more anxious to have expensive clothing or expensive food, which may perhaps have to be imported from other countries, they will at once have a motive to work, and the West Indies will cease to suffer from the present great scarcity of labour. England, therefore, offers a striking contrast in every respect to the West Indies; nothing can exceed the ceaseless industrial activity of the English people. We all of us labour, because there is some desire which we wish to gratify. Our labourers are pressed on to continuous hour by the necessity of procuring a livelihood. Our climate is rigorous, and the bounty of nature will not supply us with the means of supporting life unless we work with energy and with constancy. The middle classes are urged on to industrial activity by the desire to improve their social and material condition.

In America land and capital are plentiful, but labour dear;The economic condition of America, as far as the production of wealth is concerned, differs in some respects from that of each of the three countries we have considered. In America, labour is comparatively more scarce than either land or capital. We say comparatively more scarce, because in the West Indies the scarcity of labour is so great that the production of wealth is almost entirely prevented; but this is not the case in America, for in no country has the production of wealth advanced with greater rapidity. If, however, we compare America with England, we know that land is much cheaper in America and labour much dearer; and one of the consequences of this difference is strikingly exemplified by a circumstance which has been noticed by almost every traveller in America. effects of this upon agriculture.America is ill cultivated compared with England, and her agriculture appears to be most slovenly; there must be some cause for this difference; it cannot be explained by a commonplace remark on difference of race. An agriculturist, who may in England have cultivated his farm like a garden, will, if he emigrates to America, find it greatly to his interest to adopt a very different system of tillage. The reason of this may be best shown by an example. An English farmer, let us suppose, cultivates a hundred acres of land, for which he pays 200l. a year rent. 200l. a year expended in wages on his farm will return the farmer a fair profit for his capital and his exertion; but he may think that it will answer his purpose to farm more highly, to employ twice as much labour as before. He will be remunerated for the additional 200l. which he expends on wages, if the increased produce from the farm sufficiently exceeds the cost of this extra labour to leave the farmer a fair profit on the additional capital he has expended. If this is the case, the additional labour will be as profitable to the farmer as that which he first employed, but it will not be so productive. When only 200l. was expended on wages, the produce of this labour must have been sufficient not only to return a fair profit upon the amount expended in wages, but must also have been sufficient to cover the rent. If the additional labour employed diminishes in productiveness, it may be said why not apply it to other land? It cannot, however, be applied to equally good land without having to pay a rent for the use of the land; hence, up to a certain point, it is more remunerative to apply additional labour to the same land, although the labour diminishes in productiveness, rather than to apply the labour to other land for which rent will have to be paid. But if good land were extremely plentiful, or if, in other words, rents were extremely low as in America, it would manifestly be far more profitable to cultivate fresh land rather than apply additional labour upon land already under tillage in order to cultivate it more highly. Hence, in America much less labour is employed in the cultivation of a certain area of land than would be employed upon the same area in England, and farming is consequently more slovenly in the former than in the latter country, because in the one country land is cheaper than in the other, and labour dearer.

Comparison of the different results obtained.In this and the preceding chapter, we have investigated the laws which regulate the increase of labour, and capital, and cultivable land. These laws combined, furnish the conditions upon which depends an increase in the production of wealth. We have attempted to illustrate the manner in which these laws may be combined, by considering four countries, England, India, the West Indies, and the United States; and in each of these countries the requisites for an increased production of wealth assume, relatively, different degrees of importance. In England an abundant supply of cheap food is required; in India, an increase of capital is most essential; and in the West Indies, an increase of labour. In America the production of wealth meets with no serious impediment, and it advances with the most extraordinary rapidity. Yet, in America, there is a comparative scarcity of labour, and an ample supply of productive land. America and England have conferred upon each other the most important mutual benefits. Cheap food is essential to England's progress, and our greatest supplies are obtained from America. Cheap labour is the most valuable gift to America, and our surplus population, which would become burdensome to us if there had been no emigration, is providing America with the labour she so much needs.

All the more important propositions which concern the production of wealth have now been considered; this portion of our subject will be frequently recurred to, in order that the reader may obtain a firmer grasp of many of the principles here discussed. We now pass on to the next branch of our subject, which is the distribution of wealth.

1. The word English is here used, as in other places in this volume, to describe the inhabitants of the United Kingdom generally.