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zation advances — namely, that it consists more and more of
material and durable articles, and less and less of perishable
services, to perform which much trouble is undergone, but which
leave nothing behind them. The mediseval baron sometimes
maintained thousands of attendants and followers, whose ser-
vices, not the commodities he gave for them, constituted a large
part of his real wealth ; for the commodities became the wealth
of the retainers. On the fall of the baronial power, services of
this kind gave place to commodities, some of which were of a
durable kind, and made lasting additions to the national wealth.
But the point which especially calls for consideration in the
passage cited relates to the remuneration of superintendence,
or, as Adam Smith called it, of the labour of inspection. By

76 MarshalVs ' Economics of Industry.''

Mr. Mill this element is treated as forming, along with interest,
a constituent of profit. Mr. and Mrs. Marshall, on the other
hand, transfer it from the profit side of the account to that of
wages, classing it, under the name of earnings of management,
with the earnings or wages of skilled labour in general. There
are some tendencies in modern industrial economy to make this
eventually the proper classification, but it requires, at least, more
explanation and qualification than it has received from the
authors. They say, only, that ' We shall find it best to class
earnings of management with the earnings of other kinds of
work, because they are similar in nature to other earnings, and
are, in the long run, governed by the same laws. For though,
in the passing vicissitudes of trade it is somewhat difficult to
draw a clear line between the interest on a business-man's
capital and his earnings of management, yet we shall find that
there is little in common between those fundamental laws which
determine, in the long run, the normal rate of interest, and those
which determine, in the long run, the normal earnings of
management.' Tiie authors do not seem to have had in view
the objection to their classification suggested by Adam Smith's
observation, that the earnings of two men of business, whose
labour of inspection may be nearly the same, may differ widely,
because varying, like interest, with the amount of capital they
turn over, not with the amount of their labour. ' If,' he said,
* we suppose two manufacturers, the one employing a capital
of £1000 and the other of £7300, in a place where the common
profits of stock are ten per cent., the one will expect a profit of
about £100 a-year, while the other will expect about £730.
Yet their labour of inspection may be nearly or altogether the
same.' To put the case in another way : a grocer, with a
capital of £1000, sells at prices which leave him, let us say,
after replacing his stock with insurance, a profit of £100 a-year
for interest and trouble together. A neighbouring grocer, with
ten times the capital, gets the same prices, and makes a net
profit of £1000 a-year, with perhaps little more trouble. In
such a case the earnings of management are surely not deter-
mined by the laws which regulate wages in general, and have

MarshalVs ^Economics of Industry .'' 77

mucli more in common with those which govern the rate of
interest. Nevertheless, causes are at work, though the authors
do not bring them out clearly, tending to regulate ultimately
the earnings of management by the amount of skill and trouble
it requires, instead of by the amount of capital. The scale on
which modern business is carried on, and the growth of joint-
stock companies, have given rise to a class of managers who are
not partners, but paid by salaries for their work. And it is a
tendency of competition to force the owners of the capital so em-
ployed to sell at prices which yield only what the management
actually costs in this way. The system tends to drive small
producers and dealers out of the market ; for, a large salary to
the manager of a big business may make no sensible addition to
prices, while a proportionate remuneration to a small capitalist
for his trouble would seriously raise the price of his goods.
The growth, too, of the system of doing business on borrowed
capital, due largely to modern banking facilities, has a similar
tendency. The man working with borrowed capital may be
content with an equivalent to a large salary, and his competitors,
with capital of their own, must sell at the same prices. These
tendencies are, however, to a great extent counteracted by other
causes, which make profit include an element, over and above
interest, that varies with the amount of capital, not with the
labour of management, and which tend to assign this element
chiefly to the owners of the capital as such, not to the managers
as such. According to the authors, net profit contains no
elements, save interest and the earnings of management, which
they say are regulated by the same laws as the earnings of
skilled labour. If so, the profits of trade ought to exceed
interest only by the amount of a good manager's salary, and
the ordinary fees of directors. Yet it is certain that the divi-
dends received by the shareholders of a company may much
exceed bare interest, in consequence partly of good management,
while the managing staff receive only the ordinary remuneration.
One reason for this is, that profit includes elements which cannot
be disentangled and measured so as to determine the share due
to the management. Luck, situation, connexion, prestige, and

78 MarshalVs ^Economics of Industry,^

other elements enter, along with interest and superintendence,
into profit ; and it is impossible to say how much is due to each.
The returns to all together usually vary in proportion to the
amount of the capital embarked, not to the skill and trouble of
management, and its owners legitimately claim the surplus.
The authors' analysis of profit, accordingly, appears to us not
quite complete, and we cannot think the subject is really made
clearer by getting rid of the term profits altogether, as they
seek to do, and speaking only of interest in reference to the
gains of capital.

Another aspect of the problem of the rate of profit, as to
which Mr. and Mrs. Marshall's exposition seems to us not
entirely satisfactory, relates to the amount of the fund to be
divided between capital and labour. ' The total net annual
produce of a country's capital and industry,' they say, ' after
rent and taxes have been deducted from it, consists of the
interest on capital, and the earnings of different kinds of
industry, and we have called it the earnings- and-interest fund.*
The share, they add, which capital obtains, depends, first, upon
the amount of the fund, secondly, on the manner in which it is
divided between labour and capital. The amount of this ' net
annual produce of the country,' or aggregate national * earn-
in gs-and-interest fund,' depends, as they show, on the productive
powers of laud, labour, and capital, the state of science and art,
and so forth; and their exposition of this subject is full, though
•concise. It is, too, undoubtedly important to the economist to
have a clear view of the causes determining the amount of the
annual revenue of the nation as a whole. Yet the problem
respecting the rate of profit is a different one. The capitalists
and labourers in a trade do not simply divide between them
a share in a definite national fund, created by the general
productiveness of the whole national capital and labour ; they
themselves, in a great measure, create the particular fund which
they divide, and the amount whi-ch they will receive depends
largely on the amount of their own produce, and the economy,
as well as the skill and energy, which they exercise in its pro-
duction. Much waste and loss practically arises from the

MarshalVs ^Economics of Industry.'* 79

tendency of both capitalists and workmen to regard the amount
of profits and wages as a question, simply, of sharing a given
fund, when the most important matter is to produce it.

The authors next inquire, ' how the earnings-and-interest
fund is divided into the share which capital takes as interest,
and that which industry takes as earnings.' They proceed,
accordingly, to discuss the problem of the rate of interest, and
it is certainly one which calls for investigation in a treatise on
the economics of industry. Yet the owners of capital in busi-
ness have much else to look to. For them the point is not
merely what interest the}- could get on the best security, but
what profit the particular businesses or investments they have
under their eye are likely to afford : here they must take into
account the influence of many conditions and elements which
but remotely and slightly affect the general rate of interest.
But, confining ourselves to the question of the rate of interest,
the general proposition which Mr. and Mrs. Marshall lay down
is, that ' it will be found to depend upon ihQ urgency of the
demand of industry for the aid of capital.' Industry is rather
a vague term, and one of its misfortunes is, that it is commonly
used by French economists in a narrow and special sense. The
authors appear to mean by it, in the proposition before us,
simply labour, since they say that, ' The demand of industry
for the aid of capital will not be urgent if there is a large
supply of capital in proportion to the population. Industry
will not then be compelled to resign to capital enough of the
produce to afford a high rate of interest.' But labour has
many competitors at home and abroad for capital. Our National
Debt, and the sums which foreign States have raised in Great
Britain since the Crimean War, show how formidable is the
competition of public borrowers, and to their demand must be
added that of private borrowers for unproductive purposes, of
the intensity of which the extent to which land in the United
Kingdom is mortgaged affords an indication. Looking, how-
ever, only to the side of the question which the authors discuss,
it seems to us important to bear in mind that the shares of
labour and capital will depend, not merely on the demand of

80 MarshalVs ^Economics of Industry.^

labour for capital, but also on the demand of capital for labour,,
wbicli varies much with the mode of production. When, in the-
sixteenth century, pasture largely superseded tillage, labourers
suffered heavily from a diminished demand on the part of
capital. The authors clearly show that * The progress of
civilization increases the demand of industry for the aid of
capital, independently of any increase in the population, for it
causes a continual increase in the amount and expensiveness of
the machinery and other things which men use as means to the
attainment of their ends.' Several writers have inferred from
this fact that the increase of fixed capital is detrimental to
labourers. But this is not a necessary consequence, nor has it
been the usual consequence hitherto. The construction of rail-
ways, it is true, resulted in the conversion of much circulating
capital into rails, rolling stock, and plant. But the railways
themselves, instead of diminishing, vastly augmented, the de-
mand for labour. It was not men, but horses, they superseded
in the business of carriage, and more men are now employed by
railway companies in London alone than were employed for-
merly by all the coaches in England. The power-loom, again,,
superseded the hand-loom, but it did not diminish the demand
for manual labour in spinning and weaving ; on the contrary,,
largely augmenting it. And wherever railways and machinery
have made their way on the Continent the demand for labour
has gone up with a bound.

In connexion with the constituents of the rate of profit, it is
observable that the authors ignore altogether Mr. Mill's analysis
of gross profit into indemnity for risk or insurance, as well as
interest and remuneration of superintendence. Their reason
appears to be that they include insurance among the expenses^
of production, not in the net income which the owners of capital
receive ; but the point is one which ought to be made clear to
the student. Moreover, the actual indemnity for risk that
business investments afford by no means corresponds accurately
with the actual amount of risk. In a country like America,
and in a less degree in England, the love of speculation and
enterprise is such that risk is commonly underrated. On the

MarsJialVs ^Economics of Industry .'' 81

Continent of Europe, on the other hand, it has hitherto been
generally over-estimated through timidity, and the reluctance
of people to trust money out of their sight. These different
tendencies of national character would pro tanfo cause the
average net rate of profit in business to be higher on the
Continent of Europe than in the United States or Creat
Britain, in proportion to the rate of interest.

Another remark which the subject suggests is, that the rate
of interest on the best security, or the price of the funds, by na
means affords a measure of the amount which ought to be set
aside as insurance, and therefore as part of the cost of produc-
tion. Some of the most lucrative businesses have the good
fortune to be also the safest ; others, whose returns are scanty,
are at the same time shaky, and perhaps on their last legs. It
is not true of trade that high profits are another name for bad
security, nor does the converse hold good. The equality of
profits is an illusion.

The authors distinguish emphatically between what they
call normal values, or those which would result from the un-
disturbed action of competition, and market values, or those
actually resulting from the existing constitution and usages of
the industrial world. * The theory of normal value ' is, in their
words, ' the starting-point from which we must set out to explore
all the various irregularities and unevennesses of market values.*
The normal value of a thing, in their view, is equal to its
expenses of production ; its market value, they show, may widely
deviate from that standard. The deviations are actually greater
than they show ; but the main comment we have to make is,
that competition itself is the main cause of these deviations^
and of the irregularities and unevennesses of market values.
Industrial liberty, and the eager pursuit of gain, produce an
economic world, the vastness, variety, complexity, incessant
change, speculation, and potent influence of chance in which are
absolutely incompatible with the knowledge and nice calculation
of relative profits, upon which the theory rests that the prices of
commodities are regulated in the long run by their cost of pro-
duction. Market values, in fact, with all their ' irregularities


82 MarshalVs ^Economics of Industry.'^

and unevennesses,' are the true normal values, if by that phrase
be meant what the authors mean — the values resulting from
the action of competition. That even in the long run — to use
the somewhat lax and unscientific phrase wliich we are not a
little surprised to find writers of their powers of accurate thought
and expression repeatedly and emphatically employing — profits
are not equalized, or prices adjusted to the expense of production,
as their theory of normal value assumes, appears by their own
statement. Even in little villages, they say, in which one
might imagine at first that everyone knows all his neighbours'
affairs, and what profit every trade yields, it is not so, and very
little beyond the fact that one man seems to be prosperous,
another the reverse, is really known. Some of the villages in
which this is so have existed for several centuries — a tolerably
long run. How much less can the relative gains of all the dif-
ferent occupations of the great industrial world be known to the
owners of capital, and equalized by their competition ? The more
people investigate market values by such lights as the book before
us affords, the less heed they will give to the values of Ricardo's
theory, and the more they will be led to reverse his mode of
procedure, and to make market values the starting-point from
which to arrive at true normal values — that is to say, those
resulting from the operation of unrestricted competition.

Mr. and Mrs. Marshall's book is full of information and
novel and apposite illustration. It will, we hope, pass througli
several editions ; and among the changes which we venture to
suggest are, the total dismissal of the phrase * in the long run'
from their pages, and a less sparing application of the term
'laws' to provisional and hypothetical assumptions. There is
a kind of brain that is prodigiously fertile in the production of
' economic laws,' giving the name to every crude and hasty
generalization or guess that occurs to it ; but authors of the
scientific culture and ability which the work before us displays
need no such parade of scientific terminology to command re-
spectful attention.



Two different conceptions of Political Economy now divide
economists throughout Europe ; of which, looking to their
origin, one may be called English, the other German, though
neither meets with universal acceptance in either England or
Germany. English writers in general have treated Political
Economy as a body of universal truths or natural laws ; or at
least as a science whose fundamental principles are all fully
a,scertained and indisputable, and which has nearly reached
perfection. The view, on the other hand, now almost unani-
mously received at the universities, and gaining ground among
practical politicians, in Germany, is that it is a branch of
philosophy which has received various forms in different times
and places from antecedent and surrounding conditions of
thought, and is still at a stage of very imperfect development.
Each of these conceptions has its appropriate method ; the first
proceeding by deduction from certain postulates or assumptions,
the second by investigation of the actual course of history, or
the historical method. In England it is usual to speak of in-
duction as the method opposed to a priori deduction, but the
inductive and historical methods are identical. Both aim at
discovering the laws of succession and co- existence which have
produced the present economic structure and condition of society.
A subsidiary branch of historical investigation traces the progress
of thought and philosophical theory, but this branch has the
closest relation to the main body of economic history, since one

Fortnightly Review^ JuJy 1, 1875.
G 2

84 The History of German Political Economy.

of the chief conditions determining the subjects and forms of
thought at each period has been the actual state of society ;
and ideas and theories, again, have powerfully influenced the
actual phenomena and movement of the economic world. Dr.
Wilhelm Eoscher's * History of Political Economy in Grermany *
{Geschichte der National- Oekonomik in Deutschland) is by far
the most considerable contribution that has yet been made to
this subsidiary branch of inquiry. It would be impossible in
a few pages to review a book wliich ranges over several centuries,
and discusses the doctrines of several hundred authors, besides
drawing from numerous unnamed works. What is sought here
is to indicate some of the leading features in the history of this
department of German thought, with some observations sug-
gested by Eoscher's book, or by its subject.

An English historian cited by Eoscher speaks as if the
history of political economy had begun and almost ended with
Adam Smith. Eoscher himself begins with the Middle Ages,
and ends with the conflicting doctrines of different schools and
parties in Germany at the present day. The structure and
phenomena of mediaeval society in Germany, as elsewhere, were
far from suggesting an economic theory based on individual
interest and exchange. Common property in land, common
rights over land held in severalty ; scanty wealth of any kind,
and no inconsiderable part of it in mortmain, or otherwise
intransferable ; labour almost as immovable as the soil ; pro-
duction mainly for home consumption, not for the market ; the
division of labour in its infancy, and little circulation of money ;
the family, the commune, the corporation, the class, not indivi-
duals, the component units of society : such are some of the
leading features of mediaeval economy. In the intellectual
world the division of labour was even less advanced than in
material production; philosophy was in the hands of an ec-
clesiastical order, antagonistic to both the individual liberty
and the engrossing pursuit of wealth which modern political
economy assumes. Eoscher points to the Canon Law as
embodying the earliest economic theory, and it is deeply tinc-
tured with both communism and asceticism ; poverty is the

The History of German Political Economy. 85

state pleasing to God, superfluous wealth should be given to
the Church and the poor, interest on money is unlawful, to buy
in the cheapest and sell in the dearest market is a twofold
wrong. Nor did the secular law harmonize better with modern
economic assumptions. Every system of positive law, as
Roscher observes, has a corresponding economic system as its
background ; and the economic system at the back of the secular
law was based on status, not on contract — on duty and loyalty,
not on individual interest. Thus whether we look to the actual
economy of mediaeval Germany, to its moral philosophy, or' to
its positive law, we find a condition of things incompatible with
the economic doctrines of modern times.

A new era opened with the Reformation, and Roscher
divides the history of modern political economy in Germany
into three periods, the first of which he calls a theological and
humanistic one {das theologisch-humanistische Zeif alter), on
account of the influence of both the doctrines of the Reformers
and the literature of classical antiquity. But the economic
movement of society itself tended to awaken new ideas. The
Reformation not only created considerable economic changes of
a material kind, but was in fact the result of general social
progress, one aspect of the economic side of which shows itself
in the discovery of the new world, and the consequent revolution
in prices. In Germany, too, though to a less extent than in
England, something doubtless was visible of that change from
status to contract, and from service for duty to service for per-
sonal gain, which struck the great English poet, who was
himself among the productions of the new age.* We may take
Erasmus and Luther as representatives of the economic influences
of the new theology and classical literature in Germany. The
saying of the mendicant friars with respect to theology is true

' good old man ! how well in thee appears
The constant service of the antique world,
When service sweat for duty, not for meed !
Thou art not for the fashion of these times,
When none will sweat but for promotion.'

As You Like It, act ii., so. 3.

86 The History of German Political Economy.

also, Eoscher observes, in the region of economics, that Erasmus
laid the Q^g which Luther hatched. ' Erasmus, going hack to
the best age of classical antiquity as well as to pure Christianity,
proclaimed that labour was honourable.' Luther preached the
same doctrine, and moreover anticipated Adam Smith's proposi-
tion, that labour is the measure of value. Luther's enthusiasm
for the increase of population illustrates the connexion of the
economic ideas of the age with both its theology and its material
condition, since it sprang on the one hand from antagonism to
monastic celibacy, and on the other hand from the rapid increase
in the means of subsistence. The chief economic influences of
classical antiquity are classed by Roscher under five heads. Its
literature, being that of a high state of civilization, furthered
the rise of Germany to a higher social stage. The States from
which this literature emanated were cities, v/hose example
fostered the development of town life and economy. They
were also highly centralized States, with the liveliest national
spirit ; and their history and ideas could not but promote the
development of the modern State and of national unity, as
opposed to the mediaeval division of each nation into innu-
merable petty groups and governments. They were also either
monarchical or democratic States, the study of which tended to
accelerate the decline of the feudal aristocracy. Lastly, types
of life and thought so unlike those which the mediaeval world

Online LibraryT. E. Cliffe (Thomas Edward Cliffe) LeslieEssays in political economy → online text (page 8 of 41)