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THE LIBRARY
OF

THE UNIVERSITY

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ECONOMIC STUDIES.



WORKS BY WALTER BAGEHOT.



LITERARY STUDIES. Edited, with a Prefatory Memoir, by
Richard Holt Hutton. With a Portrait from a Photo-
graph printed by the Woodbury Process. Third Edition,
2 vols. 8vo. price 28s.

ECONOMIC STUDIE.^. Edited by Richartj Holt Hutton.
Second Edition. 8vo. price 10s. 6d.

THE POSTULATES OF ENGLISH POLITICAL ECONOMY.
(Extracted from '-Economic Studies.") Students' Edition.
With Preface by Alfred Marshall. Professor of Political
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BIOGRAPHICAL STUDIES. Edited by Richard Holt
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*jR* The Articles are tliofe contributed to tlie Economist on tlic Silver
Qne.stion, by J[r. Bagehot, with a Preface written by himself, shortly
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ECONOMIC STUDIES



BY THE LATE

WALTEE BAGEIIOT,

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EDITED BY



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PEEFATOEY NOTE TO SECOND EDITION.

Since the first edition of this Book was published, the two
first chapters, which alone received the author's final correc-
tions, have been published separately as a " Students' Edition "
for Cambridge undergraduates, with an interesting preface by
Professor INIarshall. There is, however, so much even in the
later and posthumous part of the book which is of permanent
value, that a second edition of the complete work is called
for, and is now given to the public. R. H. H.

11th September, 1888.



PEEFATOEY NOTE TO THE FIEST EDITION.

It will be obvious to the readers of this book that a con-
siderable portion of it, though hardly to be called fragmentary,
is yet not at all as complete as the author, had he lived, would
have made it ; and that, in the last two essays at all events,
there are considerable gaps which he would certainly have
filled up. Obviously, too, various other essays would have
been added — probably two or three between those which here
appear, certainly many on subjects which would naturally have
followed the last and least perfect of all the papers, that on
" Cost of Production." Indeed Mr. Bagehot is known to have
stated that his economic studies would have worked out into



VI.



three distinct volumes, one of which would have been biogra-
phical. Again, no careful reader can fail to perceive that
there is a certain amount of redundancy of statement in these
pages, as well as of omission ; and this was inevitable, for in
preparing his finished writings for the press, the author's
practice was to cut away as well as to add much, — a duty
which I was not imprudent enough to attempt to discharge
for him. Therefore, considering that only the first two essays
had been published, or even printed, in the life-time of the
author, and that, even with the most valuable help of Mr.
Robert Giffen, the head of the Statistical Department of the
Board of Trade (who, during the last years of Mr. Bagehot's
life, had a better knowledge of his economic mind than any
other person), I have had great dilticulty in determining the
precise arrangement of some parts of the MS., the folios of
which were often inaccurately numbered, I hope that the
reader may wonder less that much is incomplete, than that
so much that is complete and valuable, as well as original,
remains. No thoughtful economist, I am sure, who reads this
book, will fail to recognise the value of a great portion of
even the least perfect of these essays.

It only remains for me to express my hearty gratitude to
jVIr. Giffen for his willing and most important help, without
which I should have felt no little hesitation in deciding on
the true sequence of some passages in this volume.

30th August, 1879. E. H. H.



CO NT ENTS.

ESSAY. PAGE.

I. The Postulates of Exglisii Political Economy 1

1. Tkansferability of Labour 22

2. Transferability of CAriTAL 41

II. The Preliminaries of Political Economy ... 72

III. Adam Smith and Our ^Iodern Economy ... Do

IV. Malthus 135

V. ElCARDO 151

VI. The Gtrowtii of Capital IGl

VII. Cost of Production ... ...... 183

Appendix 210



THE POSTULATES

OF

ENGLISH POLITICAL ECONOMY.

Adam Smith completed the " Wealth of Nations "in 1776, and
our English Political Economy is therefore just a hundred
years old. In that time it has had a wonderful effect. The
life of almost everyone in England — perhaps of everyone —
is different and better in consequence of it. The whole com-
mercial policy of the country is not so much founded on it as in-
stinct with it. Ideas which are paradoxes everywhere else in
the world are accepted axioms here as results of it. No other
form of political philosophy has ever had one thousandth part
of the influence on us ; its teachings have settled down into the
common sense of the nation, and have become irreversible.

We are too familiar with the good we have thus acquired to
appreciate it properly. To do so we should see what our an-
cestors were taught. The best book on Political Economy pub-
lished in England before that of Adam Smith is Sir James
Steuart's " Inquiry," a book full of acuteness, and written by a
man of travel and cultivation. And its teaching is of this
sort : — " In all trade two things are to be considered in the
commodity sold. The first is the matter ; the second is the
labour employed to render this matter useful. The matter
exported from a country is what the country loses ; the price
of the labour exported is what it gains. If the value of the
matter imported be greater than the value of what is exported
the country gains. If a greater value of labour be imported

B



Economic Studies.



than exported the country loses. Why ? Because in the first
case strangers must have paid in matter the surplus of labour
exported ; and in the second place because the strangers must
have paid to strangers in matter the surplus of labour im-
ported. It is, therefore, a general maxim to discourage the
importation of work, and to encourage the exportation of it."

It was in a world where this was believed that our present
Political Economy began.

Abroad the influence of our English system has of course not
been nearly so great as in England itself. But even there it
has had an enormous effect. All the highest financial and com-
mercial legislation of the Continent has been founded upon it.
As curious a testimony perhaps as any to its power is to be
found in the memoir of Mollien — the financial adviser of the
first Napoleon, le hon Mollien, whom nothing would induce him
to discard because his administration brought francs, whereas
that of his more showy competitors might after all end in
ideas. " It was then," says Mollien, in giving an account of
his youth, " that I read an English book of which the disciples
whom M. Turgot had left spake with the greatest praise — the
work of Adam Smith. I had especially remarked how warmly
the venerable and judicious Malesherbes used to speak of it —
this book so deprecated by all the men of the old routine who
spoke of themselves so improperly as of the school of Colbert.
They seemed to have persuaded themselves that the most im-
portant thing for our nation was that not one sou should ever
leave France ; that so long as this was so, the kind and the
amount of taxation, the rate of wages, the greater or less per-
fection of industrial arts, were things of complete indifference,
provided always that one Frenchman gained what another
Frenchman lost."

And he describes how the " Wealth of Nations " led him to
abandon those absurdities and to substitute the views with
which we are now so familiar, but on which the " good Mollien "
dwells as on new paradoxes. In cases like this, one instance



The Postulates oj Political Economy. 3

is worth a hundred arguments. We see in a moment the sort
of efifect that our English Political Economy has had when we
find it guiding the finance of Napoleon, who hated ideologues,
and who did not love the English.

But notwithstandhig these triumphs, the position of our
Political Economy is not altogether satisfiictory. It lies rather
dead in the public mind. Not only does it not excite the same
interest as formerly, but there is not exactly the same confidence
in it. Younger men either do not study it, or do not feel that
it comes home to them, and that it matches with their most
living ideas. New sciences have come up in the last few years
with new modes of investigation, and they want to know what
is the relation of economic science, as their fathers held it, to
these new thoughts and these new instruments. They ask,
often hardly knowing it, will this " science " as it claims to be,
harmonise with what we now know to be sciences, or bear to be
tried as we now try sciences ? And they are not sure of the
answer.

Abroad, as is natural, the revolt is more avowed. Indeed,
though the Political Economy of Adam Smith penetrated deep
into the continent, what has been added in England since has
never penetrated equally ; though if our " science " is true, the
newer work required a greater intellectual effort, and is far
more complete as a scientific achievement than anything which
Adam Smith did himself. Political Economy, as it was taught
by Eicardo, has had in this respect much the same fate as
another branch of English thought of the same age, with which
it has many analogies — jurisprudence as it was taught by
Austin and Bentham ; it has remained insular. I do not mean
that it was not often read and understood; of course it
was so, though it was often misread and misunderstood.
But it never at all reigned abroad as it reigns here; never
was really fully accepted in other countries as it was here
where it arose. And no theory, economic or political, can
now be both insular and secure; foreign thoughts come soon

b2



Economic Studies.



and trouble us ; there will always be doubt here as to what is
only believed here.

There are, no doubt, obvious reasons why English Political
Economy should be thus unpopular out of England. It is
known everywhere as the theory " of PVee-trade," and out of
England Free-trade is almost everywhere unpopular. Expe-
rience shows that no belief is so difficalt to create, and no one
so easy to disturb. The Protectionist creed rises like a weed
in every soil. " Why," M. Thiers was asked, " do you give
these bounties to the French sugar refiners ? " "I wish," re-
plied he, " the tall chimneys to smoke." Every nation wishes
prosperity for some conspicuous industry. At what cost to the
consumer, by what hardship to less conspicuous industries, that
prosperity is obtained, it does not care. Indeed, it hardly
knows, it will never read, it will never apprehend the refined
reasons which prove those evils and show how great they are ;
the visible picture of the smoking chimneys absorbs the whole
mind. And, in many cases, the eagerness of England in the
Free-trade cause only does that cause harm. Foreigners say,
" Your English traders are strong and rich ; of course you wish
to under-sell our traders, who are weak and poor. You have
invented this Political Economy to enrich yourselves and ruin
us ; we will see that you shall not do so."

And that English Political Economy is more opposed to the
action of Government in all ways than most such theories,
brings it no accession of popularity. All Grovernments like to
interfere ; it elevates their position to make out that they can
cure the evils of mankind. And all zealots wish they should
interfere, for such zealots think they can and may convert the
rulers and mauipulate the State control : it is a distinct object
to convert a definite man, and if he will not be convinced there
is always a hope of his successor. But most zealots dislike to
appeal to the mass of mankind ; they know instinctively that
it will be too opaque and impenetrable for them.

Still I do not believe that these are the only reasons why our



The Postulates of Political Economy. 5

English Political Economy is not estimated at its value abroad.
I believe that this arises from its special characteristic, from
that which constitutes its peculiar value, and, paradoxical as it
may seem, I also believe that this same characteristic is like-
wise the reason why it is often not thoroughly understood in
England itself. The science of Political Economy as we
have it in England may be defined as the science of business,
such as business is in large productive and trading communi-
ties. It is an analysis of that world so familiar to many Eng-
lishmen — the " great commerce " by which England has be-
come rich. It assumes the principal facts which make that
commerce possible, and as is the way of an abstract science it
isolates and simplifies them ; it detaches them from the confu-
sion with which they are mixed in fact. And it deals too with
the men who carry on that commerce, and who make it pos-
sible. It assumes a sort of human nature such as we see
everywhere around us, and again it simplifies that human
nature ; it looks at one part of it only. Dealing with matters
of " business," it assumes that man is actuated only by motives
of business. It assumes that every man who makes anything,
makes it for money, that he alwavs makes that which brings
him in most at least cost, and that he will make it in the way
that will produce most and spend least ; it assumes that every
man who buys, buys with his whole heart, and that he who
sells, sells with his whole heart, each wanting to gain all pos-
sible advantage. Of course we know that this is not so, that
men are not like this ; but we assume it for simplicity's sake,
as an hypothesis. And this deceives many excellent people,
for from deficient education they have very indistinct ideas
what an abstract science is.

More competent persons, indeed, have understood that Eng-
lish Political Economists are not speaking of real men, but of
imaginary ones ; not of men as we see them, but of men as it
is convenient to us to suppose they are. But even they often
do not understand that the world which our Political Economists



Economic Studies.



treat of, is a very limited and peculiar world also. They often
imagine that what they read is applicable to all states of society,
and to all equally, whereas it is only true of — and only proved
as to — states of society in which commerce has largely deve-
loped, and where it has taken the form of development, or
something near the form, which it has taken in England.

This explains why abroad the science has not been well un-
derstood. Commerce, as we have it in England, is not so full-
grown anywhere else as it is here — at any rate, is not so out-
side the lands populated by the Anglo-Saxon race. Here it is
not only a thing definite and observable, but about the most
definite thing we have, the thing which it is most difficult to
help seeing. But on the continent, though there is much that
is like it, and though that much is daily growing more, there
is nowhere the same pervading entity — the same patent, press-
ing, and unmistakable object.

And this brings out too the inherent difficulty of the subject
— a difficulty which no other science, I think, presents in equal
magnitude. Years ago I heard Mr. Cobden say at a League
Meeting that " Political Economy was the highest study of the
human mind, for that the physical sciences required by no
means so hard an effort." An orator cannot be expected to be
exactly precise, and of course Political Economy is in no sense
the highest study of the mind — there are others which are
much higher, for they are concerned with things much nobler
than wealth or money ; nor is it true that the effort of mind
which Political Economy requires is nearly as great as that
required for the abstruser theories of physical science, for the
theory of gravitation, or the theory of natural selection; but,
nevertheless, what Mr. Cobden meant had — as was usual with
his first-hand mind — a great fund of truth. He meant that
Political Economy — effectual Political Economy, Political Eco-
nomy which in complex problems succeeds — is a very difficult
thing ; something altogether more abstruse and difficult, as
well as more conclusive, than that which many of those who



The Postulates of Political Economy. 7

rush in upon it have a notion of. It is an abstract science
which labours under a special hardship. Those who are con-
versant with its abstractions are usually without a true contact
with its facts ; those who are in contact with its facts have
usually little sympathy with and little cognizance of its ab-
stractions. Literary men who write about it are constantly
using what a great teacher calls " unreal words " — that is, they
are using expressions with which they have no complete vivid
picture to correspond. They are like physiologists who have
never dissected ; like astronomers who have never seen the
stars ; and, in consequence, just when they seem to be reason-
ing at their best, their knowledge of the facts falls short. Their
primitive picture fails them, and their deduction altogether
misses the mark — sometimes, indeed, goes astray so far, that
those who live and move among the facts, boldly say that they
cannot comprehend " how any one can talk such nonsense."'
Yet, on the other hand, these people who live and move
among the facts often, or mostly, cannot of themselves put to-
gether any precise reasonings about them. Men of business
have a solid judgment — a wonderful guessing power of what
is going to happen — each in his own trade ; but they have
never practised themselves in reasoning out their judgments
and in supporting their guesses by argument : probably if they
did so some of the finer and correcter parts of their anticipa-
tions would vanish. They are like the sensible lady to whom
Coleridge said, " Madam, I accept your conclusion, but you
must let me find the logic for it." Men of business can no
more put into words much of what guides their life than they
could tell another person how to' speak their language. And
so the " theory of business " leads a life of obstruction, because
theorists do not see the business, and the men of business will
not reason out the theories. Far from wondering that such a
science is not completely perfect, we should rather wonder that
it exists at all.

Something has been done to lessen the difficulty by statistics.



Economic Studies.



These give tables of facts "wliich help theoretical writers and
keep them straight, but the cure is not complete. "Writers
without experience of trade are always fancying that these
tables mean something more than, or something different from,
that which they really mean. A table of prices, for example,
seems an easy and simple thing to understand, and a whole
literature of statistics assumes that simplicity : but in fact there
are many difficulties. At the outset there is a difference be-
tween the men of theory and the men of practice. Theorists
take a table of prices as facts settled by unalterable laws ; a
stockbroker will tell you such prices can be " made." In
actual business such is his constant expression. If you ask
him what is the price of such a stock, he will say, if it be a
stock at all out of the common, " I do not know, sir : I will go
on to the market and get them to make me a price." And the
following passage from the Report of the late Foreign Loans'
Committee shows what sort of process " making " a price some-
times is : — " Immediately," they say, " after the publication of
the prospectus " — the case is that of the Honduras Loan —
" and before any allotment was made, M. Lefevre authorised
extensive purchases and sales of loans on his behalf, brokers
were employed by him to deal in the manner best calculated
to maintain the price of the stock ; the brokers so employed
instructed jobbers to purchase the stock when the market
required to be strengthened, and to sell it if the market was
sufficiently firm. In consequence of the market thus created
dealings were carried on to a very large amount. Fifty or
a hundred men were in the market dealing with each other
and the brokers all round. One jobber had sold the loan
(£2,500,000) once over."

Much money was thus abstracted from credulous rural in-
vestors ; and I regret to say that book statists are often equally,
though, less hurtfuUy, deceived. They make tables in which
artificial prices run side by side with natural ones ; in which
the price of an article like Honduras scrip, which can be indefi-



The Postulates of Political Economy. g

nitely manipulated, is treated just like the price of Consols,
which can scarcely be manipulated at all. In most cases it
never occurs to the maker of the table that there could be such
a thing as an artificial — a viald fide — price at all. He ima-
gines all prices to be equally straightforward. Perhaps, how-
ever, this may be said to be an unfair sample of price difficul-
ties, because it is drawn from the Stock Exchange, the most
complex market for prices ; — and no doubt the Stock Exchange
has its peculiar difficulties, of which I certainly shall not speak
lightly; but on the other hand, in one cardinal respect, it is
the simplest of markets. There is no question in it of the phy-
sical quality of commodities : one Turkish bond of 1858 is as
good or bad as another ; one ordinary share in a railway ex-
actly the same as any other ordinary share ; but in other mar-
kets each sample differs in quality, and it is a learning in each
market to judge of qualities, so many are they, and so fine
their gradations. Yet mere tables do not tell this, and cannot
tell it. Accordingly in a hundred cases you may see " prices "
compared as if they were prices of the same thing, when, in fact,
they are prices of different things. The Gazette average of
corn is thus compared incessantly, yet it is hardly the price of
the same exact quality of corn in any two years. It is an ave-
rage of all the prices in all the sales in all the markets. But
this year the kind of corn mostly sold may be very superior,
and last year very inferior — yet the tables compare the two
without noticing the difficulty. And when the range of prices
runs over many years, the figures are even more treacherous,
for the names remain, while the quality, the thing signified, is
changed. And of this persons not engaged in business have
no warning. Statistical tables, even those which are most ela-
borate and careful, are not substitutes for an actual cognizance
of the facts : they do not, as a rule, convey a just idea of the
movements of a trade to persons not in the trade.

It will be asked, why do you frame such a science if from its
nature it is so difficult to frame it ? The answer is that it is



lo Economic Studies.

necessary to frame it, or we must go without important know-
ledge. The facts of commerce, especially of the great commerce,
are very complex. Some of the most important are not on the
surface ; some of those most likely to confuse are on the sur-
face. If you attempt to solve such problems without some ap-
paratus of method, you are as sure to fail as if you try to take
a modern military fortress — a Metz or a Belfort — by common
assault ; you must have guns to attack the one, and method to
attack the other.

The way to be sure of this is to take a few new problems, such
as are for ever presented by investigation and life, and to see
what by mere common sense we can make of them. For example,
it is said that the general productiveness of the earth is less or
more in certain regular cycles, corresponding with perceived


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