SECTION CXCIII.
INTEREST-POLICY.—EFFORTS TO AVOID THE EVIL EFFECTS OF A FIXED RATE.
It has been thought possible to avoid the evil effects of a fixed legal rate of interest, by regulating it in such a way as to make it coincident with the rate customary in the country.[193-1]But there are numberless transactions in which an insurance premium, or premium for risk or certain expenses of administration[193-2]on the part of the loaner is inseparable from the true interest. Here, even the law which entered most into detail could never properly provide for the infinite gradations or shades of risk and trouble; and the rate in a great many transactions would, therefore, be placed below the natural height. Turgot long since observed that the value of a promise of future payment is different not only for different persons, but at different times. Thus, for instance, it is really less after there have been numerous cases of bankruptcy than at other times.[193-3]If, now, it was desired to fix the maximum rate of interest in such a way that it should equal the rate customary in the country, where the security is good, the best real property security for instance, the consequence would be, that those persons who had no such guaranty to offer (leaving the loaning "among brothers" out of the question) would either be unable to borrow money at all, or, by evading the law, only at an artificially higher rate. Hence the legislator causes injury where he wished to favor. This has been observed in England in almost all past commercial crises.[193-4]The man whomakes it his business to loan his capital, on short time and in small sums, undertakes a trade which the examination, and the surveillance of a large number of small debtors, and the necessity of reinvesting the many small sums paid him, render exceedingly[TN 26]troublesome and disagreeable. Moreover, in loaning on short terms of payment, there is always danger that his money may lie idle for some length of time. These are reasons sufficient, why, in such cases, when the whole compensation is denominated interest, a rate of interest greater than usual in the country is equitable and even necessary. (§ 179.)[193-5]
It has been frequently suggested that spendthrifts and adventurers should be hindered using, or to speak more correctly, abusing the nation's wealth by laws prohibiting the rate of interest at which they might be expected to obtain credit; and this in the interest alike of the creditors they might possibly find and in their own.[193-6]But almost every inventor ofgenius, from Columbus to Stephenson, has been obliged to be considered "an adventurer" for a time by "solid men." The law limits him thus, and more especially during the critical period of outlay which precedes the undoubted triumph of his idea, to his own means or the gifts of others.[193-7]And how inadequate, as rule, are both. The rich are as seldom discoverers, as discoverers are skillful supplicants. And, as regards spendthrifts, they may ruin themselves in so many thousands of ways, especially by buying or selling, and unhindered by the state, that it is scarcely apparent why the one way of borrowing should be legally closed to them.[193-8]How is it, if the law itself drives them into the hands of a worse class of creditors, and compels them to pay yet a higher rate of interest? Are they not simply more rapidly ruined? States, themselves, have scarcely ever given any heed to their own usury laws in borrowing or loaning.[193-9]
[193-1]In Austria, in 1803, in loaning on pledge, 4 per cent.; in other loans and in the trade of merchants with one another, 6 per cent. In France, since 1807, with merchants, 6 per cent.; with others, 5.Salmasins, De Mono Usur., c. 1, advises that the maximum should be fixed as high as that usual in the most unfavorable cases. The reduction from such rate, where possible, would regulate itself.
[193-2]Petty, Quantulumcunque concerning money, 1682.
[193-3]Sur le Prêt d'Argent, § 36.
[193-4]How many merchants would have avoided bankruptcy here if they had been allowed to borrow at 8 per cent.! The established rate of 5 per cent. was certainly too low, considering the great demand for capital and the want of confidence at the moment, to permit capital to be loaned at that rate. Many saw themselves compelled to sell their merchandise or evidences of state indebtedness at a loss of 30 per cent., in order to meet their obligations. But the person who, to anticipate the receipts due in 6 months, for instance, consents to suffer a loss of 30 per cent., pays, in a certain sense, interest at the rate of 60 per cent. a year. CompareTooke, Considerations on the State of the Currency, 60, and History of Prices, II, 163, on the Crisis of 1825-26. Since the Bank, least of all, could exceed the legal rate of interest, numberless applications were made to it in times of war in order to obtain the difference between the legal rate and the rate usual in the country. (Thornton, Paper Credit of Great Britain, ch. 10.) Prussia, November 27, 1857, suspended the usury laws for 3 months, on account of the commercial crisis, except the provisions relating to pawn-broker and minors.
[193-5]Turgottells of Parisian "usurers" who made weekly advances to the market women of la Halle, and received for 3 livres, 2 sous interest; that is 173 per cent. a year. The premium for insurance may have been very high here. When such loaners were brought before the courts, and they were sentenced to the galleys, the usual punishment for usury, their debtors came and testified their gratitude by begging for mercy to them! (Mémoire sur le Prêt d'Argent, § 14, 31.) CompareCantillon, Nature du Commerce, 276.
[193-6]Thus,Adam Smith, Wealth of Nations, II, ch. 4. Similarly,RoeslerGrundsätze, 495 ff. Compare,per contra,Jer. Bentham, Defense of Usury: showing the Impolicy of the present legal Restraints on the Terms of pecuniary Bargains in Letters to a Friend. To which is added a Letter to Adam Smith on the Discouragement imposed by the above Restraints to the Progress of inventive Industry, 1787; 3 ed., 1816.
[193-7]The first steamboat in the United States was, for a long time, called the "Fulton-folly!"
[193-8]It is just as hard to see why only money-capital should have a fixed rate of interest, and not buildings, etc. likewise.
[193-9]In Holland, the legal rate of interest was lowered, in 1640, to 5 per cent., and in 1655 to 4; but not since. (Sir J. Child, Discourse of Trade, 151.) Besides,Locke, Considerations on the Lowering of Interest, Works, III, 34, assures us that, in his time, a man in England could make contracts for unlimited interest.
SECTION CXCIV.
INTEREST-POLICY.—REPEAL OF THE USURY LAWS.
However, the complete repeal of the usury laws[194-1]has notunder all circumstances accomplished what it was supposed it would; and the state should take great care, lest by an incautious framing of its laws, it should put judges in such a position that they may be compelled to coöperate in the execution of immoral contracts.[194-2]In the lowest strata, so to speak, of the loaning business, the medieval condition continues to exist (§ 190) after it has disappeared in the upper. Here, the loan is effected scarcely ever for the purposes of production, but most generally because of the most urgent necessity; and the debtor is not in a condition, from want of education, and especially from his ignorance of arithmetic, to estimate the magnitude of the burthen he has undertaken. The business of loaning is, under such circumstances, considered dishonorable, to someextent, by the public. And when a business necessary in itself is held disreputable by public opinion, the usual result is that bad men alone engage in it.[194-3]Real competition which would but fix the natural price is wanting here in proportion as the debtor is anxious for secrecy.[194-4]
Abuses in this respect are best guarded against by the establishment of government loan-institutions, and by the publicity of the administration of justice to debtors.[194-5]Besides, every contract might be prohibited the terms of which were such that an inexperienced borrower could not from them obtain aclear conception of the burthen he accepts, or which hindered him from paying the debt at a proper time.[194-6]
Lastly, there should be a rate of legal interest fixed by the state to be charged in such cases as interest is found to be in justice due, but in which none is provided for by contract; and this rate should approximate as nearly as possible to the rate usual in the country.[194-7][194-8]
[194-1]In 1787, Joseph II. abolished the penalties for usury, but allowed the provisions denying a legal remedy, in cases of usurious demand of over 4 per cent. for hypothecations, 6 per cent. for bills and 5 per cent. for other loans, to remain. Compare the prize essay byGünther, Versuch einer vollständigen Untersuchung über Wucher und Wuchergesetze, 1790;v. Kees, über die Aufhebung der Wuchergesetze, 1791;Vasco, Usura libera, 1792. The opposite view represented byOrtes, E. N., II, 24, andv. Sonnenfels, Ueber Wucher und Wuchergesetze, 1789, and zu Herrnvon Kees, Abhandlung, etc., 1791. The debates on the repeal of the usury laws in the French Chamber of Deputies, after whichLherbette'smotion in favor of their repeal was rejected. In France they were, during the assignat-period of bewilderment virtually, and in 1804-1807 expressly (C. C., Art. 1907), but only provisionally repealed. In Würtemberg, all those having the right to draw bills of exchange were exempted from them in 1839. Since the law of 1848, governing bills of exchange, gave all persons capable of contracting, the right to draw bills of exchange, the usury laws have ceased to have any existence; without much noise before and without much complaint after. (A. Allgem. Ztg., 24 März, 1857.) Recent complete or partial repeal of the usury laws: in England, in 1854; in Denmark, in 1855; in Spain, in 1856; Sardinia, Holland, Norway and Geneva, 1857; Oldenburg, 1858; Bremen, 1859; in the kingdoms of Saxony and Sweden, in 1864; Belgium, 1865; Prussia, the North German Confederation,[TN 27]and to some extent Austria, in 1867.
[194-2]CompareF. X. Funck, Zins und Wucher, 1868, a moral theological treatise which rightly demands a more rigid popular morality in relation to real usury, after the repeal of the usury laws. The recent cases in which courts have juridically acquitted usurers because they could not do otherwise, but have branded them morally, are of very questionable propriety, in view of the facility with which high and usurious rates of interest may be confounded.R. Meyer, Emancipationskampf, I, 78, advises that the capitalist be allowed to ask whatever interest he wishes, but that the state, as judge and executor of the laws, should enforce payment only at a certain rate determined by law.
[194-3]Many laws seem to purposely permit this, inasmuch as they allow a rate of interest, higher in proportion as the position of the creditor is less respectable. Thus, formerly, in some places, the Jews might require higher interest than the Christians. Justinian allowspersonis illustribusonly 4 per cent.; ordinary private persons, 6 per cent.; money-changers, etc., 8 per cent. (L. 26, Cod. IV, 32.) On the other hand, according to the Indian legislation of Menu, the Brahman is obliged to confine himself to 2, the warrior to 3, thevaysyato 4, thesudrato 5 per cent. per month at most. (Cap. 8.)
[194-4]Turgotconsidered that only theprêteurs à la petite semaine, pawnbrokers who loaned to hard-pressed people on the confines of the middle class and artisans, and the infamous characters who advanced money to the sons of rich men to spend in dissipation, still passed for usurers. Only the latter are injurious; not, however, because of the high rate of interest they charge, but because they help in a bad cause. (Sur le Prêt d'Argent, § 32.) According toColquhoun, Police of the Metropolis, 167, there are women in London from whom the hucksteresses borrow 5 shillings every day and return them every evening with ½ shilling interest. Something analogous happens much more frequently in the country, especially in the loaning in kind of productive capital to poor persons. Thus, in Tessin, there are many "iron cattle" which the borrower is obliged to return at their original value, plus an interest of about 36 per cent. (Franscini, C. Tessin, 152.) On the Rhine, frequently as much as 200 per cent. a year, is stipulated for in such contracts.Morstadt, der N. Oekonom. Heft., IX, 727.
[194-5]CompareJ. J. Becher, Polit. Discurs, 1668, 219;v. Schröder, F. Schatz- und Rentkammer, Bd. §§ 123, 133 ff. The firstmontes pictatiswere expressly intended to check the usury of the Jews. Thus, in Florence, in 1495, after the expulsion of the Jews, voluntary contributions were made to found a municipal loaning establishment. Similarly,Tiberius, Tacit. Ann., VI, 16 seq.Count Soden, Nat-Oek., IV, 57; V, 319, advises that all contracts for interest should be recorded in a public registry, under pain of their being held not actionable.
[194-6]Günther, loc. cit., thinks that, in every contract in which the rate of interest is masked, its real rate should be expressed under penalty of invalidity. In addition to this, he would have those who have attained their majority put in full control of their fortune only after they had undergone an examination.
It seems opportune that the old prohibition against interest on interest (Cicero, ad. Att., V, 21, and L, 26, Digest, XIV, 6) and the provision that the interest should not be permitted to be greater than thealterum tantum(Digest, l. c.) should be permitted to continue. (Digest, l. c.) Both of these measures were first decreed by Lucullus, for the protection of Asia Minor. Compare § 115. Florentine law, of 1693, that interest in arrears, or that interest on interest beyond 7 years, should not be added to the principal without an express contract to that effect. (Vasco, Usura libera, § 155.) In England, the usury laws were by 2 and 3 Victor., c. 37, repealed, but only to the extent of excepting from their provisions bills of not over 12 months, and money loans not over £10. CompareRau, Lehrbuch II, § 323.
[194-7]CompareLocke, Considerations: Works, 10, 32 ff. In Spain, the Council of State is required to regulate the rate of legal interest yearly (law of 1856, art. 8); a thing which, according toBraun, would be better done in each individual case by the judges themselves. (Faucher'sVierteljahrsschrift, 1868, II, 13.)
[194-8]In Athens, the rate of interest in general was voluntary from the time of Solon, who, however, did away with slavery for debt. (Lysias adv. Theomn., 360.) Yet there was a legal rate of interest of 18 per cent. for the case in which a divorced husband delayed the return of his wife's dowry. CompareBöckh, Staatshaushalt der Athener, I, 148.
SECTION CXCV.
THE REWARD OF ENTERPRISE.
The essence of an enterprise or undertaking, in the politico-economical sense of the word, consists in this, that the undertaking party engages in production for the purpose of commerce, at his own risk. In the earlier stages of a nation's economy, the production of consumers is, naturally enough, limited chiefly by their own personal wants. Somewhat later, when the division of labor has been further developed, the workman produces at first, enough to meet occasional determinate "orders;" and still later to meet them regularly and as a business. Later yet, and in stages of civilization yet higher, especially when the freedom of labor constantly grows, as it is wont to, here, and the freedom of capital and trade becomes more extensive, enterprise plays a part which grows more important as time rolls on, and is usually carried on more at one's own risk.[195-1]This transition is a great advance, inasmuch as the advantages of the coöperation of labor and ofusemay be utilized in a much higher degree by undertakers (Unternehmer) than by producers who labor only to satisfy their own household wants, or to meet "orders" already made.The awakening of latent wants, a matter of the utmost importance to a people who would advance in civilization, is something which can enter into the mind only of a man endowed with the spirit of enterprise (an undertaker).[195-2]
While most English political economists have confounded the personal gain of the undertaker with the interest on the capital used by him,[195-3]many German writers have called the "undertaker's earnings" or profit a special, and fourth, branch of the national income, coördinate with rent, wages, and the interest on capital.[195-4]Yet, the net income of every undertakeris either the fruit of his own land used for purposes of production and of his capital, in which case it is subject to the usual laws of development of rent and interest; or, it must be considered as wages paid for his labor.[195-5]These wages he earns, as a rule, by organizing and inspecting the work, calculating the chances of the whole enterprise; frequently by, at the same time, keeping the books and acting as cashier; and, in the case of small undertakings, as a common fellow-workman. (Tradesman, peasant). In every case, however, even when heputs an agent paid by himself in his place, he earns these wages from the fact that his name keeps the whole enterprise together; and for the reason that, in the last instance,[195-6]he has to bear the care and responsibility attending it.[195-7]When a business goes wrong, the salaried director or foreman may permit himself to be called on to engage in another; but the weary, watchful nights belong to the undertaker or man of enterprise, alone; and "how productive such nights frequently are!"[195-8]
This profit of the undertaker is subject essentially to the same natural law as wages in general are; only it differs in this from all other branches of income, that it can never be stipulated for in advance. Rather does it consist of the surplus which the product of the undertaking affords over and above all the rent stipulated for in advance or estimated at the rate usual in the country, the interest on capital, and wages of common labor.[195-9]
[195-1]At first, usually imperfect enterprises in which the shop-instruments, etc., are kept ready for present orders; and then complete or perfect enterprises. (v. Mangoldt, Volkswirthschaftslehre, 255.)
[195-2]v. Mangoldt, Lehre vom Unternehmergewinn, 1855, 49 ff. The same author shows, in his Volkswirthschaftslehre, that it is better for the general good that the risk should be borne by the producer than by the consumer. In the case of the taking of orders, there is danger only of a technic failure, but in enterprise proper, there is possible also an economic miscarriage of the work, even when successful from a technic point of view. But in the case of the undertaker (man of enterprise), responsibility is much more of an incentive, production much more steady, and therefore much better able to exhaust all means of help. Consumers are much more certain in their steps, as regards price, etc., since they find what they want ready made.
[195-3]ThusJohn Stuart Mill, Principles, II, ch. 15, 4, teaches with a certain amount of emphasis that the "gross profits of stock" are different not so much in the different branches in which capital is employed, as according to the personal capacity of the capitalist himself or of his agents. There are scarcely two producers who produce at precisely the same cost, even when their products are equal in quality, and equally cheap. Nor are there two who turn over their capital in precisely the same time. These "gross profits" uniformly fall into three classes: reward for abstinence, indemnity for risk, remuneration for the labor and skill required for superintendence.Millcomplains that there is in English no expression corresponding to the Frenchprofit de l'entrepreneur. [The translator has taken the liberty to use the expression "undertaker's profit," for what the French call theprofit de l'entrepreneur, and the GermansUnternehmerlohn, spite of its funereal associations, and because Mill himself employed it, although he recognized that it was not in good usage.—Tr.] (II, ch. 15, 1)Adam Smithhad the true doctrine in germ (Wealth of Nat., I, ch. 6), but those who came after him did little to develop it. CompareRicardo, Principles, ch. 6. 21.Read, Political Economy, 1829, 262 ff., andSenior, Outlines, 130 seq., were the first to divide profit into two parts: interest-rent (Zinsrente) and industrial gain. Similarly,Sismondi, N. P., IV, ch. 6. According toA. Walker, Science of Wealth, 1867, 253, 285, "profits are wages received by the employer."
[195-4]Hufeland, Grundlegung, I, 290 ff.;Schön, Nat-Oek., 87, 112 ff.;Riedel, Nat-Oek., II, 7 ff.;von Thünen, Der isolirte Staat, II, 1 80 ff.;v. Mangoldt, Unternehmergewinn, 34 ff. The latter divides the undertaker's profit (profit de l'entrepreneur) into the following parts:
A. Indemnity for risk. If this be only an indemnity exactly corresponding to the risk, it cannot be looked upon at all as net income, but only as an indemnification for capital. If individual undertakers, favored by fortune, receive a much larger indemnification than is necessary to cover their losses, such indemnification is not income either, but an extraordinary profit not unlike a lottery-gain, unless it be called, perhaps, the reward of extraordinary courage (Eiselen), i. e., wages. If, lastly, the indemnity is uniformly somewhat larger than the risk, in order to compensate for the continual feeling that one is running a risk, it must be remembered that all remuneration for present sacrifice, made directly for the sake of production, is wont to be embraced under the name of wages.
B. Wages and interest for the labor and capital utilized only in one's own production, and which cannot be let.v. Mangoldthimself admits, that, in the long run, only certain qualified labor belongs to this category.
C. Undertaker's rent (Unternekmerrente) depending on the rarity of undertakers (men of enterprise) compared with the demand. This, therefore, is not a third component part, but only one which adds to the other two,Storch, Handbuch, I, 180, andRau, Lehrbuch, I, § 237 ff., consider the profit of the undertaker as an admixture of wages and interest. ProfessorJ. Miscszewiczhas given expression to an interesting thought in opposition to myself: that credit is a fourth factor of production (natural forces, labor and capital being the other three) produced by the three older factors, as capital by the two oldest. The undertaker's profit he then considers the product of this fourth factor, corresponding to rent, interest and wages.
[195-5]CompareCanard, Principes, ch. 3;J. B. Say, Traité, II, ch. 7, Cours pratique, V, 1-2, 7-9, distinguishes three branches of income: rent, interest and the profits of industry; and he divides the latter again into the profits of thesavant, the undertaker and workmen, (v. Jacob, Grundsätze der Nat.-Oek., § 292;Lotz, Handbuch, I, 471;Schmalz, Staatswirthschaftslehre, I, 116;Nebenius, Oeff. Credit, I, Aufl., 466.)
[195-6]I need only call attention to the influence that the mere name of a general sometimes exerts over the achievements and sometimes even over the composition of his army (Wallenstein!); and how important it sometimes is to keep his death a secret. And so the mere name of a minister of finance may facilitate loans, etc.
[195-7]It is sufficient to mention the different positions occupied by the shareholders and preferred creditors of a joint-stock company.
[195-8]Comparevon Thünen'sIsolirter Statt, II, 80 ff., and his Life, 1868, 96.Meister muss sich immer plagen!(Schiller.) See a long catalogue of books on the position of the undertaker in the principal different branches of industry inSteinlein, Handbuch der Volkswirthschaftslehre, I, 445 ff.
[195-9]Tantièmesoccupy a middle place between wages and the undertaker's profit; dividends a middle place between undertaker's profit and the interest of capital. On this is basedRodbertus'sview, that an increase of joint stock companies raisesceteris paribusthe rate of interest, and an increase of productive associations the rate of wages, for the reason that in each instance, there is some admixture of "undertaker's profit," or reward of enterprise.
SECTION CXCVI.
UNDERTAKER'S PROFIT.—CIRCUMSTANCES ON WHICH IT DEPENDS.
As the wages or reward of labor, in all instances, depends on the circumstances mentioned in § 167 ff., so, also does the reward of enterprise; in other words, the undertaker's profit or wages. It depends, therefore:
A. On the rarity of the personal qualities required in a business, which qualities may be divided into technical and ethical qualities. Among the latter are, especially, the capacity to inspire capitalists with confidence and workmen with love for their task; the administrative talent to systematize a great whole made up of men and to order it properly, to keep it together by sternness of discipline in which pedantry has no part, and by economy with no admixture of avarice; and frequently endurance and even presence of mind. These ethical, statesmanlike qualities are, take them all in all, a more indispensable condition of high undertaker's profit than the technical are.[196-1]
B. On the risk of the undertaking in which not only one's property, but one's reputation, may be lost.[196-2]
C. As to the disagreeableness of the undertaking or enterprise, we must take into especial consideration the disinclination of capitalists in general to assume the care and trouble of concerning themselves directly with the employment of their capital. (§ 183.) The undertaker's profit is, besides, lower in proportion as he needs to care less for the profitable applicationof the different sources of production, and for their preservation. Hence it is, in general, higher for the direction of circulating than of fixed capital; in speculative trade and in wholesale trade which extends to the whole world, than in retail trade and merely local business.[196-3]
It has, indeed, been remarked, that the undertaker's profit is, as a rule, proportioned to the capital employed.[196-4]This may be true in most cases, but only as the accidental compromise between opposing forces. It is evident that the greater the enterprise is, the greater may be the surplus over and above the compensation stipulated for in advance of all the coöperating productive forces, and not only absolutely but also relatively. We need only call to mind the successful results attending the greater division of labor (§ 66) and the greater division of use (Gebrauchstheilung) (§ 207); the greater facility of using remains in production on a large scale, and the fact that all purchases, and all obtaining of capital are made, when the items are large, at cheaper rates, because of the more convenient conducting of the business.
This is true up to the point where the magnitude of the whole becomes so great as to render the conducting of it difficult. Considered even subjectively, the great undertaker, whose name and responsibility keep a great many productive forces together, may demand a higher reward, because there are so few persons competent to do the same. On the other hand, it cannot be denied that a support in keeping with his position may be called the amount of the cost of production of the undertaker's labor. If this cost is once fixed by custom, it will, of course, be relatively high in those branches of business which permit only of the employment of a small capital.[196-5]
In the higher stages of civilization, the undertaker's profit has, like the rate of interest, a tendency to decline. This decline is, indeed, in part, only an apparent one, caused by the decreased risk and the smaller indemnity-premium. But it is, in part, a real one, produced by the increased competition of undertakers.[196-6]The more intelligent landowners and workmenbecome, the more readily do they acquire the capacity and desire to use the productive forces peculiar to them in undertakings of their own; and the number of retired persons who live from their rents grows smaller with the decline of the rate of interest. The strong competition of undertakers now leads to degeneration, and undertakings or enterprises become usual in which the gains or losses are subjective, and are destitute of all politico-economical productiveness; for instance, the purchase of growing fruits, and businesses carried on in "margins," or differences. It is self-evident that the circumstances which retard the rate of interest, or turn it retrograde, would have a similar effect on the undertaker's profit. (§ 186.) On the whole, a rapidly growing people meet with great gains and losses, but the preponderance is in favor of the former. A stationary people are wont to become more and more careful and cautious. A declining people underestimate the chances of loss, although in their case they tend more and more to preponderate over the chances of gain. (v. Mangoldt.)
[196-1]ThusArkwright, by his talent for organization principally, attained to royal wealth, whileHargreaves, a greater inventive genius, from a technic point of view, had to bear all the hardships of extreme poverty.
[196-2]An experienced Frenchman,Godard, estimates that of 100 industrial enterprises attempted or begun, 20 fail altogether before they have so much as taken root; that from 50 to 60 vegetate for a time in continual danger of failing altogether, and that, at the furthest, 10 succeed well, but scarcely with an enduring success. (Enquête commerciale de 1834, II, 233.)
[196-3]ThusGanilh, Théorie de l'Economie politique I, p. 145, was of the opinion that in France's foreign trade the profit was only 20, and in its internal trade, scarcely 10 per cent. of the value put in circulation.
[196-4]Hermannloc. cit. 208.
[196-5]According toSinclair, Grundgesetze des Ackerbaues, 1821, the profit on capital of English farmers was wont to be from 10 to 18 per cent. Only in very remarkable cases, by persons in very favorable circumstances, was from 15 to 20 per cent. earned; that is, on the whole, less than in commerce and industry. In the case of farmers of meadow land, 15 per cent. and even more was not unusual; because there is a need of less outlay here, but more mercantile speculation, especially in the fattening of live stock.
At the end of the last century English farmers expected 10 per cent. profit on their capital. (A. Young, View of the Agriculture of Suffolk, 1797, 25.) And soSenioris of opinion that, in the England of to-day, industrial enterprises of £100,000 yield a profit of less than 10 per cent. a year; those of £40,000, at least 12½ per cent.; those of from £10,000 to £20,000, 15 per cent.; smaller ones 20 per cent. and even more. He makes mention of fruit hucksters who earned over 20 per cent. a day; that is, over 7,000 per cent. a year! (Outlines, 203 seq.) In Manchester, manufacturers, according to the same authority, turned over their capital twice a year at 5 per cent.; retail dealers, three times a year at 3½ per cent. (Ibid, 143.)Torrens, The Budget (1844), 108, designates 7 per cent. as the minimum profit which would induce an English capitalist to engage in an enterprise of his own. According tov. Viebahn, Statistik des Regierungsbezirks Düsseldorf, 836, I, 180, the undertaker's profit, i. e., the surplus money of the value of the manufactured articles, after deduction made of the raw material and wages, in the Berg country, amounted to, in 81 iron factories, 146,400 thalers; in 6 cotton factories, to 21,200 thalers; in 15 cloth factories, to 14,725 thalers; in 4 worsted factories, to 1,700 thalers; in 4 brush factories, to 800 thalers; in 2 tobacco factories to 10,220 thalers; in 2 paper factories, to 7,400 thalers; on an average, 1,924 thalers; although many undertakers earned only from 200 to 400 thalers, and some few from 5,000 to 10,000 thalers.
[196-6]This is, of course somewhat oppressive to many individuals, and hence we find that in those countries which are unquestionably making great advances in civilization, there are so many complaints of alleged growing impoverishment. CompareSam. Fortrey, England's Interest and Improvement, 1663;R. Coke, A Treatise wherein is demonstrated that the Church and State of England are in equal danger with the Trade of it, 1671. Britania languens, showing the Grounds and Reasons of the Increase and Decay of Land, etc., 1680. And per contra, England's great Happiness, wherein is demonstrated that a great Part of our Complaints are causeless, 1677. Analogous claims might be shown to exist in Germany by a collection of almost any number of opinions advanced during the last thirty years.
SECTION CXCVI (a.).
UNDERTAKER'S PROFIT.—HAVING THE "LEAD."
The undertaker's profit is that branch of the national income in which the greater number of new fortunes are made. If a landowner has a large income, he generally considers himself obliged to make a correspondingly large outlay, one in keeping with his position; and workmen who are not undertakers themselves seldom have the means to make large savings. Besides, undertakers stand between the purchasers of their products and the lessors of the productive forces used by them in the peculiarly favorable situation which I may describe by the expression: having, as they say in card-playing, "the lead."[196a-1]When, in the struggle for prices, one party occupiesa position which enables him to observe every change of circumstance much sooner than his opponent, the latter may always suffer from the effects of erroneous prices. If, for instance, the productiveness of business increases, even without any personal merit of the individual undertakers themselves, it will always be some time before the decline in the price of commodities and the rise in the rate of interest take place, as a result of the increased competition of undertakers, consequent upon the extraordinary rate of the undertaker's profit. It is difficult, and even impossible in most instances for the proprietors of the productive forces which they have rented out, to immediately estimate accurately the profit made by undertakers. On the other hand, the least enhancement of the price of the forces of production is immediately felt by the undertakers, and causes them to raise their prices. They just as quickly observe a decline of the prices of the commodities, and know how to make others bear it by lowering wages and the rate of interest.[196a-2]It should not be forgotten that the persons most expert, far-seeing, active and expeditious in things economic, belong to the undertaking class.[196a-3][196a-4]
[196a-1]The same principle is effective in intermediate commerce, and in the intervention of bankers between government and state creditors.
[196a-2]This is much less the case in rents, for the reason that contracts here are made for a much longer term. Hence, here the farmer has as much to fear as to hope from a change of circumstances. Hence, too, we meet with a farmer who has grown rich much more seldom than with a manufacturer or a merchant.
[196a-3]If an undertaker can cede his higher reward to another and guaranty its continuance, the circumstances which enable him to do this assume the nature of fixed capital; for instance, the trade orclientèlesecured by custom or privilege. If the undertaker has not the power to dispose of it in this way, the increased profit either disappears with his retirement from the business or falls to the owner of the capital employed, and still more to the land owner. Thus, for instance, how frequently it has happened that a store, which has been largely resorted to by the public, drawn thither by the business tact of the lessee, has afterwards been rented by the owner at a higher rent! (Hermann, loc. cit. 210.)
[196a-4]Lassalle'ssocialistic attacks on Political Economy have been directed mainly against the undertaker's profit or reward. Compare the work "Bastiat-Schulze von Delitzsch, der ökonom. Julian oder Kapital und Arbeit," 1863. By means of state credit, he would have this branch of income turned over to common labor.Dühringalso, Kapital und Arbeit 90, declaims not so much against capital as against "the absolutism of undertakers."SchäffleD. Vierteljahrsschrift Nr. 106, II, 223, objects to this, that undertakers give value in exchange to unfinished products, a great service rendered even to the laboring class, who otherwise would have to resign the advantages of the division of labor.
The undertaker's profit is precisely the part of the great politico-economical tree from which further growth chiefly takes place. To artificially arrest it, therefore, would be to hasten the stationary state, and thus make general and greater the pressure on workmen and capitalists, which it is sought to remove locally. HenceRoesler, Grundsätze, 507 ff., very appropriately calls the undertaker's profit the premium paid by society to those who most effectually combat the "law of rent." The importance of a good undertaker may be clearly seen when a joint stock manufacturing company pays a dividend of from 20 to 30 per cent., while one close by, of the same kind, produces no profit whatever. But, at the same time, the socialistic hatred of this branch of income may be easily accounted for, in a time full of stock-jobbing, which last never produces except a pseudo-undertaker's profit.
SECTION CXCVII.
INFLUENCE OF THE BRANCHES OF INCOME ON THE PRICE OF COMMODITIES.
We have seen, § 106, that the cost of production of a commodity, considered from the point of view of individual economy, may be reduced to the payment for the use of the requisite productive forces rented or loaned to the producer. Hence every great variation in the relation of the three branches of income to one another must produce a correspondingvariation in the price of commodities.[197-1]When, for instance, the rate of wages increases because they absorb a larger part of the national income, those commodities in the production of which human labor, directly employed, is the chief factor, must become dearer as compared with others. Whether this difference shall be felt principally by the products of nature or of capital (compare § 46 seq.), depends on the causes which brought about the enhancement of the rate of wages. Thus, a large decrease of population, or emigration on a large scale, will usually lower rent as well as the rate of interest;[197-2]an extraordinary improvement made in the art of agriculture, only the former; and an extraordinary increase of capital, only the latter. The usual course of things, namely that the growth of population necessitates a heavier draft on the resources of the soil, and thus causes rents to go up, and makes labor dear, must have the effect of raising the price of the products of labor and of natural forces, as compared with the products of capital; and all the more as it causes the rate of interest to suffer a positive decline. The products of mechanical labor become relatively cheaper; and cheaper in proportion as the producing machinery is more durable; therefore in proportion as, in the price of the services it renders, mere interest preponderates over compensation for its wear and tear.[197-3]
Let us, for a moment, leave ground-rent out of the question entirely, and suppose a nation's economy whose production is conducted by eleven undertakers employed on different commodities. Let us suppose that undertaker No. 1 uses machinery exclusively and employs only as many workmen as are strictly necessary to look after it, that undertaker No. 2 has a somewhat larger number of workmen and a somewhat smaller amount of fixed capital, etc.; and that this increase in the number of workmen and decrease in the amount of fixed capital continues until we reach undertaker No. 11, who employs all his capital in the payment of wages. If now, the rate of wages were to rise, and the interest on capital to fall in the same proportion, the commodities produced by undertaker No. 11 would rise most in price, and those of No. 1 decline most. In the case of undertaker No. 6, the opposing influences would probably balance each other, and if the producers of money belonged to this sixth class, it would be very easy to get a view of the whole change in the circumstances of production, in the money-price of the different commodities.[197-4]
[197-1]CompareAdam Smith, I, ch. 7, fin. This relative increase or decrease of one branch of income at the expense or to the advantage of another, should be distinguished from the absolute change of its amount which does not affect the cost of production. Thus, for instance, when the rent of land indeed increases, but in consequence of a simultaneous improvement in agriculture, a decline in the rate of interest, and an enhancement of the price of wheat is avoided (§ 157). So, too, when individual wages increase on account of the greater skill and energy of labor, but the same quantity and quality of labor do not become dearer (§ 172 seq.); and lastly, when the rate of interest remaining unaltered, the receipts of capitalists are increased by reason of an increase of their capital (§ 185).
[197-2]After the great plague in the 14th century in England, when all the products of labor became dearer, skins and wool fell largely in price:Rogers, I, § 400.
[197-3]Anyone who carefully reads all the five divisions ofRicardo'sfirst chapter will soon find that this great thinker rightly understood the foregoing, although the great abstractness and hypothetical nature of his conclusions might easily lead the reader astray. The proposition which closes the second part, and which has been so frequently misunderstood by his disciples, can be maintained only on the supposition that the prices of all commodities hitherto have been made up of equal proportions of rent, capital and wages. But think of Brussels lace and South American skins!
[197-4]CompareJ. Mill, Anfangsgründe der polit. Oekonomie, Jacob's translation, § 13 ff.;McCulloch, Principles, III, 6.Adam Smithwas of opinion, that higher wages enhanced the price of commodities in an arithmetical ratio, a higher rate of interest in a geometrical one (I, ch. 9). SimilarlyChild, Discourse of Trade, 38. This lastKraus, Staatswirthschaft, better expresses by saying that an increase in the rate of interest operates in the ratio of the compounded interests.
SECTION CXCVIII.
REMEDY IN CASE ONE FACTOR OF PRODUCTION HAS BECOME DEARER.
When one of the three branches of income has grown as compared with the others; in other words, when the factor of production which it represents has become relatively dearer, it is to the interest of the undertaker and of the public, that it should be replaced where possible by another and cheaper productive force. (§ 47.) On this depends the advantageousness ofintensiveagriculture (high farming) in every higher stage of civilization. There land is dear and labor cheap. Hence, efforts are made to get along with the least amount of land-surface, and this minimum of land is made more productive by a number of expedients in cultivation, by manuring it, by seed-corn, etc., of course also by the employment of journeymen laborers, oxen, etc. And since the price of land is intimately connected with the price of most raw material, remains are here saved as much as possible, often with a great deal of trouble.[198-1]In a lower stage of civilization, such savings would be considered extravagance. As land is here cheap, and capital dear, it is necessary to carry on the cultivation of landextensively; that is, save in capital and labor, and allow the factor nature to perform the most possible. The clearing up of untilled land, or the draining of swampy land etc., would be frequently injurious here; for it would require the use of a very large amount of capital to obtain land of comparatively little value.
In large cities, it is customary to build houses high in proportion to the dearness of the land.[198-2]Thus, in England, wherethe rate of interest is low and wages high, labor is readily supplanted by capital. In countries like the East Indies or China, the reverse is the case. I need only call attention to the palanquins used in Asia instead of carriages; to the men who in South America carried ore down eighteen hundred steps to the smelting furnaces,[198-3]and, on the other hand, to the "elevators," so much in favor in England, which are used in factories to carry people from one story to another inside to save them the trouble of going up stairs.[198-4]
[198-1]The sickle instead of the scythe; careful threshing by hand, and, where the rate of interest is low, threshing by machinery instead of the treading out of the sheaf by oxen. Thus in Paris the scraps from restaurants and soap factories are made into stearin; and the remnants in shawl factories in Vienna are sent to Belgium to be used by cloth manufacturers.
[198-2]Remarked in ancient times of Tyre, which was situated on a small island, and, therefore, without the possibility of horizontal extension. (Strabo, XVI, 757.)
[198-3]Humboldt, N. Espagne II, ch. 5, II, ch. 11.
[198-4]Thus, in England, the safety of railroad trains is not secured as in Germany by a multitude of watchmen, etc.; but by solid barriers, by bridges at every crossing, in other words, by capital.
SECTION CXCIX.
INFLUENCE OF FOREIGN TRADE.
Foreign trade, that great means of coöperation of labor among different nations, affords such a remedy in a very special manner. It very frequently happens that the undertakers of one country, when a certain factor of production seems too dear at home, borrow it elsewhere. Thus, for instance, a country with a high rate of wages draws on another for labor, and one with a high rate of interest on another for capital.[199-1]We elsewhere consider such a course of things from the standpoint of the supplying country, which in this way is healed of a heavy plethora of some single factor of production which disturbs the harmony of the whole. (§§ 187, 259, ff.). But, at the same time, the supplied country, considered from apurely economic point of view, reaps decided advantages therefrom. If, for instance, a Swiss confectioner returns from Saint Petersburgh to his home, after having made a fortune in an honest way, no one can say that Russia has grown poorer by the amount of that fortune. This man made his own capital; if he were to remain in Russia, its national economy would be richer than before his immigration thither. Now, it is, at least, no poorer, and has in the meantime had the advantage of the more skilled labor of the foreigner.[199-2]And, so, when a capitalist living in Germany purchases Hungarian land, the national income of Hungary is diminished by the amount of the annual rent which now goes to Germany; but it receives an equal amount in the interest on capital, provided the purchase was an honorable one and the capital given in exchange for the land honestly invested.[199-3]If Hungary, in general, had a superabundance of land but a lack of capital, the economic advantage is undoubted.[199-4]
These economic rules, indeed, are applicable only to the extentthat higher and national considerations do not in the interest of all, create exceptions to them. "Is not the life more than meat, and the body than raiment?" No rational people will allow certain services to be performed for them preponderantly by foreigners, even when they can be performed cheaper by the latter—the services of religion, of the army, of the state, etc. The same is true of landownership; and all the truer in proportion as political and legal rights of presentation and other forms of patronage are attached to it. Lastly, hypothecation-debts which go beyond certain limits, may entail the same consequences as the complete alienation of the land;[199-5]and Raynal may have been, under certain circumstances, right when he said, that to admit foreigners to subscribe to the national debt was equivalent to ceding a province to them.[199-6]It is obvious that a great power may do much in this relation that would be a risk to a small state.[199-7][199-8]
[199-1]"The transportation of productive capital and industrial forces from one point where their services are worse paid for, to another where they find a rich reward, will not be apt to be made so long as the equilibrium may be obtained [most frequently much more easily] by the interchange of the products." (Nebenius, Oeff. Credit, I, 48.) The repeal of the corn laws in England certainly diminished the emigration of English capital.
[199-2]For an official declaration of the Brazilian state in this direction, see Novara Reise.
[199-3]Basing himself hereon,Petty, Political Anatomy of Ireland, 82 ff., questions the usual opinion, that Ireland suffered so much from absenteeism. He says that a prohibition of absenteeism carried out to its logical conclusion would require every man to sit on the sod he had tilled himself.Carey, On the Rate of Wages, 1835, 477, calls English capitalists who draw interest from America, absentees.
[199-4]The older political economists have, as a rule, ignored this law, and were wont to consider every payment of money to a foreign country as injurious. Thus, for instance,Culpeper, Tract against the high Rate of Usury, 1623, 1640, disapproves all loans made from foreign countries, because they draw more money in interest, and in repayment of the principal out of the nation, than they brought into it at first; and all the more, as the loan is generally procured, not in the precious metals, but in foreign goods, of which there is a superabundance in the home country. SimilarlyChild, Discourse of Trade, 1690, 79, who claims that the creditor was always fattened at the expense of the debtor. Hencev. Schröder, Fürst, Schatz- und Rentkammar, 141, advises that the capital borrowed in foreign countries should be confiscated. Compare, also,v. Justi, Staatswirthschaft, II, 461. And yet the very simplest calculation shows, that if a man borrows $1,000 at 5 per cent. and makes 10, he is doing a good business with the borrowed capital. ThisLocke, Considerations, 9, recognizes very clearly. Compare, also,J. B. Say, Traité, II, ch. 10, andHermann, Staatsw. Unters., 365 seq.
[199-5]Think of the English creditors in Portugal and the Genoese in Corsica (Steuart, Principles, II, ch. 29.) Considered simply from an economic standpoint, the Edinburg Review, XX, 358, very clearly demonstrates that England should recruit her army from Ireland, where wages are so much lower than in Great Britain. But how dangerous in a political sense! In 1832, one-fourth of the stock of the United States Bank was in the hands of foreigners, and hence its opponents nick-named it the "British Bank." By the rules of the principal bank in Philadelphia, in 1836, only American citizens were allowed a vote in its proceedings. Similarly in the case of the Bank of France. (M. Chevalier, Lettres sur l'Amerique du N. I, 364.) It may be remarked in general, that the older political economists have based correct political views on false economic principles, while the more modern ignore them entirely.
[199-6]CompareMontesquieu, E. des Lois L, XXII, 17;Blackstone, Commentaries, I, 320.
[199-7]Thus Austria conceded, in 1854-55, a number of railways to French capitalists, and always favored the purchase of landed estates by small foreign princes. In the latter case, Austrian influence abroad was much more promoted by the measure than was foreign influence in Austria.
[199-8]Every nationality is not worth the sacrificing of the highest economic advantage or profit to it. Or, would it be preferable to leave the Hottentots and Caffirs, poor, barbarous and heathenish?
SECTION CC.
INFLUENCE OF THE BRANCHES OF INCOME ON THE PRICE OF COMMODITIES.
In relation to foreign trade, in the narrowest sense of the term, fears were formerly very frequently expressed and are sometimes even now, which in the last analysis are based on the assumption that one country might be underbid by another in all branches of commodities.[200-1]This is evidently absurd. Whoever wants to pay for foreign commodities can do it only in goods of his own. When he pays for them with money, the money is either the immediate product of his own husbandry (mining countries!), or the mediate product obtained by the previous surrender of products of his own. To receive from foreign countries all the objects which one has need of, would be to receive them as a gift.
It is just as absurd to fear that the three branches of income in the same country's economy should be all relatively high at the same time, and competition with foreign countries be thus made more difficult. Rent and interest especially in this respect have to demean themselves in ways diametrically opposed to each other.[200-2]When trade is entirely free, every nation will engage at last in those branches of production which require chiefly the productive forces which are cheapest in that country; that is which the relatively low level of the corresponding branch of income recommends to individual economy and enterprise. The merely absolute and personal height of the three branches of income has, as we havesaid, no direct influence on the price of commodities. In this respect, all these may be higher in one country than in another. Thus, for instance, English landowners, capitalists and workmen may be all at the same time in a better economic condition respectively than Polish landowners, capitalists and workmen, when the national income of England stands to its area and population in general, in a much more favorable ratio than the Polish.[200-3]
[200-1]Thus,Forbonnais, Eléments du Commerce I, 73.J. Moser, Patr. Ph., I, No. 2.
[200-2]For a thorough refutation of the error that everything is dearer in England than in France, see Journ. des Econ., Mai, 1854, 295 seq. A distinguished architect assured me in 1858, that a person in London could build about as much for £1 as for from 6 to 7 thalers in Berlin; only the aggregate expense in both countries is made up of elements very different in their relative proportions.
[200-3]We very frequently hear that countries with high wages must be outflanked in a neutral market by countries with a low rate of wages.Ricardo'sdisciples reject this, because a decrease in the profit would put the undertaker in a condition to bear the loss caused by the high wages paid. See Report of the Select Committee on Artisans and Machinery.Seniorridicules such reasoning very appropriately by inquiring: "Might not the loss enable him to bear the loss?" Outlines, 146. And soJ. B. Saythinks that wages are always lowest when undertakers are earning nothing. The truth is rather this: a country with a relatively high rate of wages cannot, in a neutral market, offer those commodities the chief factors required for the production of which is labor; but the comparatively low rate of interest or low rents, or the lowness of both found in connection therewith, must fit it to produce other commodities very advantageously. If, therefore, the rate of wages rises, the result will be to divert production and exports into other channels than those in which they have hitherto flowed. The old complaint of Saxon agriculturists, that there is a lack of labor in the country, is certainly very surprising in a nation as thickly populated as Saxony. But the remedy proposed by the most experienced practitioners consists chiefly in a higher rate of wages to enable workmen to care for themselves in old age, the introduction of the piece-work system and an increase of agricultural machines. But it seems to me, that the whole situation there points to the advantage of in part limiting the large farming hitherto practiced to live-stock raising and other branches in which labor may be spared, and in part of replacing it, by small farming of plants which are objects of trade.