John Stuart Mill on Public Works Spending

The essay below was written by John Stuart Mill in the years 1829-1830, when Mill, born in 1806, was about 24 years old. It is rather long, but the first bit, in particular, does a nice job of demolishing the idea that public works spending is the high road to economic success. This may seem like it is beating a dead horse, but politicians do reach for this again and again -- Japan in the 1990s, and China in the 1999-2000 period. While it is not too common that public works and higher taxes (to pay for them) are paired together conceptually, the fact is that higher taxes often follow a few years later as the government's finances are rather negatively affected by the public works spending. "Public works" is a sort of catch-all phrase. In the US today, it is far more likely that the military becomes the recipient of a counter-recessionary spending binge.

The leading economists of Mill's day weren't much interested in the wondrous economic miracles produced by sloppy government spending. You'd never catch David Ricardo or Adam Smith nattering on about it. However, in the previous era, the Mercantilist writers loved this sort of stuff. Politicians of every era have latched onto the idea of greater government spending in a recession, but among intellectuals it was revived of course by John Maynard Keynes in the 1930s. Keynes had a strong sense that he was returning to Mercantilist thought.

Actually, it seems to me that the message that Keynes was trying to bring was that the government should be counter-recessionary. At the time, it was conventional wisdom to raise taxes on the onset of recession due to dropping tax revenues and resulting budget deficits. Of course this doesn't help, and in the 1930s, made things much, much worse (the tax hikes of the period were enormous). Keynes argued that maybe a budget deficit was ok, and that maybe increased government spending could actually make things better. Keynes was rather deluded and confused in his arguments, unfortunately. The real point to make was not that spending money is the solution to all ills, but that raising taxes in a recession is a bad idea. What if Keynes had instead argued that lowering taxes in a recession was the thing to do? Makes sense to me. Government spending in a recession is not necessarily such a bad thing, and indeed it can be considered a sort of welfare program. However, as it is really just a welfare program, it doesn't have the wondrous economy-boosting effects that many claim. It is very expensive, and its effects tend to peter out as soon as the money stops flowing.

Lastly, since we were trying to determine exactly what it is that economists think they are studying (I would claim that most academic economists can't even get this one right), here is Mill's opinion:

Political Economy, then, may be defined as follows; and the definition

seems to be complete:--

"The science which traces the laws of such of the phenomena of society

as arise from the combined operations of mankind for the production of

wealth, in so far as those phenomena are not modified by the pursuit of

any other object."

Mill's writing could use a bit more pizzazz -- I suppose he was only 24 at the time -- but the basic elements are there. The "combined operations of mankind for the production of wealth" is the important bit. In other words, the process of specialization, organization and trade in the production of the things we want, ie "wealth." I like my definition better:

Economics is the study of how people make a living.

But that is mostly a stylistic change. I would say that my definition and Mill's are essentially the same.

http://www.gutenberg.org/files/12004/12004-8.txt

ESSAY II.

OF THE INFLUENCE OF CONSUMPTION ON PRODUCTION.

Before the appearance of those great writers whose discoveries have

given to political economy its present comparatively scientific

character, the ideas universally entertained both by theorists and by

practical men, on the causes of national wealth, were grounded upon

certain general views, which almost all who have given any considerable

attention to the subject now justly hold to be completely erroneous.

Among the mistakes which were most pernicious in their direct

consequences, and tended in the greatest degree to prevent a just

conception of the objects of the science, or of the test to be applied

to the solution of the questions which it presents, was the immense

importance attached to consumption. The great end of legislation in

matters of national wealth, according to the prevalent opinion, was to

create consumers. A great and rapid consumption was what the producers,

of all classes and denominations, wanted, to enrich themselves and the

country. This object, under the varying names of an extensive demand, a

brisk circulation, a great expenditure of money, and sometimes _totidem

verbis_ a large consumption, was conceived to be the great condition of

prosperity.

It is not necessary, in the present state of the science, to contest

this doctrine in the most flagrantly absurd of its forms or of its

applications. The utility of a large government expenditure, for the

purpose of encouraging industry, is no longer maintained. Taxes are not

now esteemed to be "like the dews of heaven, which return again in

prolific showers." It is no longer supposed that you benefit the

producer by taking his money, provided you give it to him again in

exchange for his goods. There is nothing which impresses a person of

reflection with a stronger sense of the shallowness of the political

reasonings of the last two centuries, than the general reception so long

given to a doctrine which, if it proves anything, proves that the more

you take from the pockets of the people to spend on your own pleasures,

the richer they grow; that the man who steals money out of a shop,

provided he expends it all again at the same shop, is a benefactor to

the tradesman whom he robs, and that the same operation, repeated

sufficiently often, would make the tradesman's fortune.

In opposition to these palpable absurdities, it was triumphantly

established by political economists, that consumption never needs

encouragement. All which is produced is already consumed, either for the

purpose of reproduction or of enjoyment. The person who saves his income

is no less a consumer than he who spends it: he consumes it in a

different way; it supplies food and clothing to be consumed, tools and

materials to be used, by productive labourers. Consumption, therefore,

already takes place to the greatest extent which the amount of

production admits of; but, of the two kinds of consumption, reproductive

and unproductive, the former alone adds to the national wealth, the

latter impairs it. What is consumed for mere enjoyment, is gone; what is

consumed for reproduction, leaves commodities of equal value, commonly

with the addition of a profit. The usual effect of the attempts of

government to encourage consumption, is merely to prevent saving; that

is, to promote unproductive consumption at the expense of reproductive,

and diminish the national wealth by the very means which were intended

to increase it.

What a country wants to make it richer, is never consumption, but

production. Where there is the latter, we may be sure that there is no

want of the former. To produce, implies that the producer desires to

consume; why else should he give himself useless labour? He may not wish

to consume what he himself produces, but his motive for producing and

selling is the desire to buy. Therefore, if the producers generally

produce and sell more and more, they certainly also buy more and more.

Each may not want more of what he himself produces, but each wants more

of what some other produces; and, by producing what the other wants,

hopes to obtain what the other produces. There will never, therefore, be

a greater quantity produced, of commodities in general, than there are

consumers for. But there may be, and always are, abundance of persons

who have the inclination to become consumers of some commodity, but are

unable to satisfy their wish, because they have not the means of

producing either that, or anything to give in exchange for it. The

legislator, therefore, needs not give himself any concern about

consumption. There will always be consumption for everything which can

be produced, until the wants of all who possess the means of producing

are completely satisfied, and then production will not increase any

farther. The legislator has to look solely to two points: that no

obstacle shall exist to prevent those who have the means of producing,

from employing those means as they find most for their interest; and

that those who have not at present the means of producing, to the extent

of their desire to consume, shall have every facility afforded to their

acquiring the means, that, becoming producers, they may be enabled to

consume.

These general principles are now well understood by almost all who

profess to have studied the subject, and are disputed by few except

those who ostentatiously proclaim their contempt for such studies. We

touch upon the question, not in the hope of rendering these fundamental

truths clearer than they already are, but to perform a task, so useful

and needful, that it is to be wished it were oftener deemed part of the

business of those who direct their assaults against ancient prejudices,

--that of seeing that no scattered particles of important truth are

buried and lost in the ruins of exploded error. Every prejudice, which

has long and extensively prevailed among the educated and intelligent,

must certainly be borne out by some strong appearance of evidence; and

when it is found that the evidence does not prove the received

conclusion, it is of the highest importance to see what it does prove.

If this be thought not worth inquiring into, an error conformable to

appearances is often merely exchanged for an error contrary to

appearances; while, even if the result be truth, it is paradoxical

truth, and will have difficulty in obtaining credence while the false

appearances remain.

Let us therefore inquire into the nature of the appearances, which gave

rise to the belief that a great demand, a brisk circulation, a rapid

consumption (three equivalent expressions), are a cause of national

prosperity.

If every man produced for himself, or with his capital employed others

to produce, everything which he required, customers and their wants

would be a matter of profound indifference to him. He would be rich, if

he had produced and stored up a large supply of the articles which he

was likely to require; and poor, if he had stored up none at all, or not

enough to last until he could produce more.

The case, however, is different after the separation of employments. In

civilized society, a single producer confines himself to the production

of one commodity, or a small number of commodities; and his affluence

depends, not solely upon the quantity of his commodity which he has

produced and laid in store, but upon his success in finding purchasers

for that commodity.

It is true, therefore, of every particular producer or dealer, that

a great demand, a brisk circulation, a rapid consumption, of the

commodities which he sells at his shop or produces in his manufactory,

is important to him. The dealer whose shop is crowded with customers,

who can dispose of a product almost the very moment it is completed,

makes large profits, while his next neighbour, with an equal capital

but fewer customers, gains comparatively little.

It was natural that, in this case, as in a hundred others, the analogy

of an individual should be unduly applied to a nation: as it has been

concluded that a nation generally gains in wealth by the conquest of a

province, because an individual frequently does so by the acquisition of

an estate; and as, because an individual estimates his riches by the

quantity of money which he can command, it was long deemed an excellent

contrivance for enriching a country, to heap up artificially the

greatest possible quantity of the precious metals within it.

Let us examine, then, more closely than has usually been done, the case

from which the misleading analogy is drawn. Let us ascertain to what

extent the two cases actually resemble; what is the explanation of the

false appearance, and the real nature of the phenomenon which, being

seen indistinctly, has led to a false conclusion.

       *       *       *       *       *

We shall propose for examination a very simple case, but the explanation

of which will suffice to clear up all other cases which fall within the

same principle. Suppose that a number of foreigners with large incomes

arrive in a country, and there expend those incomes: will this operation

be beneficial, as respects the national wealth, to the country which

receives these immigrants? Yes, say many political economists, if they

save any part of their incomes, and employ them reproductively; because

then an addition is made to the national capital, and the produce is a

clear increase of the national wealth. But if the foreigner expends all

his income unproductively, it is no benefit to the country, say they,

and for the following reason.

If the foreigner had his income remitted to him in bread and beef, coats

and shoes, and all the other articles which he was desirous to consume,

it would not be pretended that his eating, drinking, and wearing them,

on our shores rather than on his own, could be of any advantage to us in

point of wealth. Now, the case is not different if his income is

remitted to him in some one commodity, as, for instance, in money. For

whatever takes place afterwards, with a view to the supply of his wants,

is a mere exchange of equivalents; and it is impossible that a person

should ever be enriched by merely receiving an equal value in exchange

for an equal value.

When it is said that the purchases of the foreign consumer give

employment to capital which would otherwise yield no profit to its

owner, the same political economists reject this proposition as

involving the fallacy of what has been called a "general glut." They

say, that the capital, which any person has chosen to produce and to

accumulate, can always find employment, since the fact that he has

accumulated it proves that he had an unsatisfied desire; and if he

cannot find anything to produce for the wants of other consumers, he can

for his own.

It is impossible to contest these propositions as thus stated. But there

is one consideration which clearly shews, that there is something more

in the matter than is here taken into the account; and this is, that the

above reasoning tends distinctly to prove, that it does a tradesman no

good to go into his shop and buy his goods. How can he be enriched? it

might be asked. He merely receives a certain value in money, for an

equivalent value in goods. Neither does this give employment to his

capital; for there never exists more capital than can find employment,

and if one person does not buy his goods another will; or if nobody

does, there is over-production in that business, he can remove his

capital, and find employment for it in another trade.

Every one sees the fallacy of this reasoning as applied to individual

producers. Every one knows that as applied to them it has not even the

semblance of plausibility; that the wealth of a producer does in a great

measure depend upon the number of his customers, and that in general

every additional purchaser does really add to his profits. If the

reasoning, which would be so absurd if applied to individuals, be

applicable to nations, the principle on which it rests must require much

explanation and elucidation.

Let us endeavour to analyse with precision the real nature of the

advantage which a producer derives from an addition to the number of his

customers.

For this purpose, it is necessary that we should premise a single

observation on the meaning of the word capital. It is usually defined,

the food, clothing, and other articles set aside for the consumption of

the labourer, together with the materials and instruments of production.

This definition appears to us peculiarly liable to misapprehension; and

much vagueness and some narrow views have, we conceive, occasionally

resulted from its being interpreted with too mechanical an adherence to

the literal meaning of the words.

The capital, whether of an individual or of a nation, consists, we

apprehend, of all matters possessing exchangeable value, which the

individual or the nation has in his or in its possession for the purpose

of reproduction, and not for the purpose of the owner's unproductive

enjoyment. All unsold goods, therefore, constitute a part of the

national capital, and of the capital of the producer or dealer to whom

they belong. It is true that tools, materials, and the articles on which

the labourer is supported, are the only articles which are directly

subservient to production: and if I have a capital consisting of money,

or of goods in a warehouse, I can only employ them as means of

production in so far as they are capable of being exchanged for the

articles which conduce directly to that end. But the food, machinery,

&c, which will ultimately be purchased with the goods in my warehouse,

may at this moment not be in the country, may not be even in existence.

If, after having sold the goods, I hire labourers with the money, and

set them to work, I am surely employing capital, though the corn, which

in the form of bread those labourers may buy with the money, may be now

in warehouse at Dantzic, or perhaps not yet above ground.

Whatever, therefore, is destined to be employed reproductively, either

in its existing shape, or indirectly by a previous (or even subsequent)

exchange, is capital. Suppose that I have laid out all the money I

possess in wages and tools, and that the article I produce is just

completed: in the interval which elapses before I can sell the article,

realize the proceeds, and lay them out again in wages and tools, will it

be said that I have no capital? Certainly not: I have the same capital

as before, perhaps a greater, but it is locked up, as the expression is,

and not disposable.

When we have thus seen accurately what really constitutes capital, it

becomes obvious, that of the capital of a country, there is at all times

a very large proportion lying idle. The annual produce of a country is

never any thing approaching in magnitude to what it might be if all the

resources devoted to reproduction, if all the capital, in short, of the

country, were in full employment.

If every commodity on an average remained unsold for a length of time

equal to that required for its production, it is obvious that, at any

one time, no more than half the productive capital of the country would

be really performing the functions of capital. The two halves would

relieve one another, like the semichori in a Greek tragedy; or rather

the half which was in employment would be a fluctuating portion,

composed of varying parts; but the result would be, that each producer

would be able to produce every year only half as large a supply of

commodities, as he could produce if he were sure of selling them the

moment the production was completed.

This, or something like it, is however the habitual state, at every

instant, of a very large proportion of all the capitalists in the world.

The number of producers, or dealers, who turn over their capital, as the

expression is, in the shortest possible time, is very small. There are

few who have so rapid a sale for their wares, that all the goods which

their own capital, or the capital which they can borrow, enables them to

supply, are carried off as fast as they can be supplied. The majority

have not an _extent of business_, at all adequate to the amount of the

capital they dispose of. It is true that, in the communities in which

industry and commerce are practised with greatest success, the

contrivances of banking enable the possessor of a larger capital than he

can employ in his own business, to employ it productively and derive a

revenue from it notwithstanding. Yet even then, there is, of necessity,

a great quantity of capital which remains fixed in the shape of

implements, machinery, buildings, &c, whether it is only half employed,

or in complete employment: and every dealer keeps a stock in trade, to

be ready for a possible sudden demand, though he probably may not be

able to dispose of it for an indefinite period.

This perpetual non-employment of a large proportion of capital, is the

price we pay for the division of labour. The purchase is worth what it

costs; but the price is considerable.

Of the importance of the fact which has just been noticed there are

three signal proofs. One is, the large sum often given for the goodwill

of a particular business. Another is, the large rent which is paid for

shops in certain situations, near a great thoroughfare for example,

which have no advantage except that the occupier may expect a larger

body of customers, and be enabled to turn over his capital more quickly.

Another is, that in many trades, there are some dealers who sell

articles of an equal quality at a lower price than other dealers. Of

course, this is not a voluntary sacrifice of profits: they expect by the

consequent overflow of customers to turn over their capital more

quickly, and to be gainers by keeping the whole of their capital in more

constant employment, though on any given operation their gains are less.

The reasoning cited in the earlier part of this paper, to show the

uselessness of a mere purchaser or customer, for enriching a nation or

an individual, applies only to the case of dealers who have already as

much business as their capital admits of, and as rapid a sale for their

commodities as is possible. To such dealers an additional purchaser is

really of no use; for, if they are sure of selling all their commodities

the moment those commodities are on sale, it is of no consequence whether

they sell them to one person or to another. But it is questionable

whether there be any dealers in whose case this hypothesis is exactly

verified; and to the great majority it is not applicable at all. An

additional customer, to most dealers, is equivalent to an increase of

their productive capital. He enables them to convert a portion of their

capital which was lying idle (and which could never have become

productive in their hands until a customer was found) into wages and

instruments of production; and if we suppose that the commodity, unless

bought by him, would not have found a purchaser for a year after, then

all which a capital of that value can enable men to produce during a

year, is clear gain--gain to the dealer, or producer, and to the

labourers whom he will employ, and thus (if no one sustains any

corresponding loss) gain to the nation. The aggregate produce of the

country for the succeeding year is, therefore, increased; not by the

mere exchange, but by calling into activity a portion of the national

capital, which, had it not been for the exchange, would have remained

for some time longer unemployed.

Thus there are actually at all times producers and dealers, of all, or

nearly all classes, whose capital is lying partially idle, because they

have not found the means of fulfilling the condition which the division

of labour renders indispensable to the full employment of capital,--viz.,

that of exchanging their products with each other. If these persons

could find one another out, they could mutually relieve each other from

this disadvantage. Any two shopkeepers, in insufficient employment, who

agreed to deal at each other's shops so long as they could there

purchase articles of as good a quality as elsewhere, and at as low a

price, would render the nation a service. It may be said that they must

previously have dealt, to the same amount, with some other dealers; but

this is erroneous, since they could only have obtained the means of

purchasing by being previously enabled to sell. By their compact, each

would gain a customer, who would call his capital into fuller employment;

each therefore would obtain an increased produce; and they would thus be

enabled to become better customers to each other than they could be to

third parties.

It is obvious that every dealer who has not business sufficient fully to

employ his capital (which is the case with all dealers when they commence

business, and with many to the end of their lives), is in this

predicament simply for want of some one with whom to exchange his

commodities; and as there are such persons to about the same degree

probably in all trades, it is evident that if these persons sought one

another out, they have their remedy in their own hands, and by each

other's assistance might bring their capital into more full employment.

We are now qualified to define the exact nature of the benefit which a

producer or dealer derives from the acquisition of a new customer. It is

as follows:--

1. If any part of his own capital was locked up in the form of unsold

goods, producing (for a longer period or a shorter) nothing at all;

a portion of this is called into greater activity, and becomes more

constantly productive. But to this we must add some further advantages.

2. If the additional demand exceeds what can be supplied by setting at

liberty the capital which exists in the state of unsold goods; and if

the dealer has additional resources, which were productively invested

(in the public funds, for instance), but not in his own trade; he is

enabled to obtain, on a portion of these, not mere interest, but profit,

and so to gain that difference between the rate of profit and the rate

of interest, which may be considered as "wages of superintendance."

3. If all the dealer's capital is employed in his own trade, and no part

of it locked up as unsold goods, the new demand affords him additional

encouragement to save, by enabling his savings to yield him not merely

interest, but profit; and if he does not choose to save (or until he

shall have saved), it enables him to carry on an additional business

with borrowed capital, and so gain the difference between interest and

profit, or, in other words, to receive wages of superintendance on a

larger amount of capital.

This, it will be found, is a complete account of all the gains which a

dealer in any commodity can derive from an accession to the number of

those who deal with him: and it is evident to every one, that these

advantages are real and important, and that they are the cause which

induces a dealer of any kind to desire an increase of his business.

It follows from these premises, that the arrival of a new unproductive

consumer (living on his own means) in any place, be that place a

village, a town, or an entire country, is beneficial to that place, if

it causes to any of the dealers of the place any of the advantages above

enumerated, without withdrawing an equal advantage of the same kind from

any other dealer of the same place.

This accordingly is the test by which we must try all such questions,

and by which the propriety of the analogical argument, from dealing with

a tradesman to dealing with a nation, must be decided.

Let us take, for instance, as our example, Paris, which is much

frequented by strangers from various parts of the world, who, as

sojourners there, live unproductively upon their means. Let us consider

whether the presence of these persons is beneficial, in an _industrial_

point of view, to Paris.

We exclude from the consideration that portion of the strangers' incomes

which they pay to natives as direct remuneration for service, or labour

of any description. This is obviously beneficial to the country. An

increase in the funds expended in employing labour, whether that labour

be productive or unproductive, tends equally to raise wages. The

condition of the whole labouring class is, so far, benefited. It is true

that the labourers thus employed by sojourners are probably, in part or

altogether, withdrawn from productive employment. But this is far from

being an evil; for either the situation of the labouring classes is

improved, which is far more than an equivalent for a diminution in mere

production, or the rise of wages acts as a stimulus to population, and

then the number of productive labourers becomes as great as before.

To this we may add, that what the sojourners pay as wages of labour or

service (whether constant or casual), though expended unproductively by

the first possessor, may, when it passes into the hands of the receivers,

be by them saved, and invested in a productive employment. If so, a direct

addition is made to the national capital.

All this is obvious, and is sufficiently allowed by political economists;

who have invariably set apart the gains of all persons coming under the

class of domestic servants, as real advantages arising to a place from

the residence there of an increased number of unproductive consumers.

We have only to examine whether the purchases of commodities by these

unproductive consumers, confer the same kind of benefit upon the

village, town, or nation, which is bestowed upon a particular tradesman

by dealing at his shop.

Now it is obvious that the sojourners, on their arrival, confer the

benefit in question upon some dealers, who did not enjoy it before. They

purchase their food, and many other articles, from the dealers in the

place. They, therefore, call the capital of some dealers, which was

locked up in unsold goods, into more active employment. They encourage

them to save, and enable them to receive wages of superintendance upon a

larger amount of capital. These effects being undeniable, the question

is, whether the presence of the sojourners deprives any others of the

Paris dealers of a similar advantage.

It will be seen that it does; and nothing will then remain but a

comparison of the amounts.

It is obvious to all who reflect (and was shown in the paper which

precedes this) that the remittances to persons who expend their incomes

in foreign countries are, after a slight passage of the precious metals,

defrayed in commodities: and that the result commonly is, an increase of

exports and a diminution of imports, until the latter fall short of the

former by the amount of the remittances.

The arrival, therefore, of the strangers (say from England), while it

creates at Paris a market for commodities equivalent in value to their

funds, displaces in the market other commodities to an equal value. To

the extent of the increase of exports from England into France in the

way of remittance, it introduces additional commodities which, by their

cheapness, displace others formerly produced in that country. To the

extent of the diminution of imports into England from France,

commodities which existed or which were habitually produced in that

country are deprived of a market, or can only find one at a price not

sufficient to defray the cost.

It must, therefore, be a matter of mere accident, if by arriving in a

place, the new unproductive consumer causes any net advantage to its

industry, of the kind which we are now examining. Not to mention that

this, like any other change in the channels of trade, may render useless

a portion of fixed capital, and so far injure the national wealth.

A distinction, however, must here be made.

The place to which the new unproductive consumers have come, may be a

town or village, as well as a country. If a town or village, it may

either be or not be a place having an export trade.

If the place had no previous trade except with the immediate

neighbourhood, there are no exports and imports, by the new arrangement

of which, the remittance can be made. There is no capital, formerly

employed in manufacturing for the foreign market, which is now brought

into less full employment.

Yet the remittance evidently is still made in commodities, but in this

case without displacing any which were produced before. To shew this, it

is necessary to make the following remarks.

The reason why towns exist, is that _ceteris paribus_ it is convenient,

in order to save cost of carriage, that the production of commodities

should take place as far as practicable in the immediate vicinity of the

consumer. Capital finds its way so easily from town to country and from

country to town, that the amount of capital in the town will be regulated

wholly by the amount which can be employed there more conveniently than

elsewhere. Consequently the capital of a place will be such as is

sufficient

1st. To produce all commodities which from local circumstances can be

produced there at less cost than elsewhere: and if this be the case to

any great extent, it will be an exporting town. When we say _produced_,

we may add, or _stored_.

2nd. To produce and retail the commodities which are consumed by the

inhabitants of the town, and the place of whose production is in other

respects a matter of indifference. To the inhabitants of the town must

be added such dwellers in the adjoining country, as are nearer to that

place than to any other equally well furnished market.

Now, if new unproductive consumers resort to the place, it is clear that

for the latter of these two purposes, more capital will be required than

before. Consequently, if less is not required for the former purpose,

more capital will establish itself at the place.

Until this additional capital has arrived, the producers and dealers

already on the spot will enjoy great advantages. Every particle of their

own capital will be called into the most active employment. What their

capital does not enable them to supply, will be got from others at a

distance, who cannot supply it on such favourable terms; consequently

they will be in the predicament of possessing a partial monopoly

--receiving for every thing a price regulated by a higher cost of

production than they are compelled to pay. They also, being in possession

of the market, will be enabled to make a large portion of the new capital

pass through their hands, and thus to earn wages of superintendance upon

it.

If, indeed, the place from whence the strangers came, previously traded

with that where they have taken up their abode, the effect of their

arrival is, that the exports of the town will diminish, and that it will

be supplied from abroad with something which it previously produced at

home. In this way an amount of capital will be set free equal to that

required, and there will be no increase on the whole. The removal of the

court from London to Birmingham would not necessarily, though it would

probably [6], increase the amount of capital in the latter place. The

afflux of money to Birmingham, and its efflux from London, would render

it cheaper to make some articles in London for Birmingham consumption;

and to make others in London for home consumption, which were formerly

brought from Birmingham.

But instead of Birmingham, an exporting town, suppose a village, or a

town which only produced and retailed for itself and its immediate

vicinity. The remittances must come thither in the shape of money; and

though the money would not remain, but would be sent away in exchange

for commodities, it would, however, first pass through the hands of the

producers and dealers in the place, and would by them be exported in

exchange for the articles which they require--viz. the materials, tools,

and subsistence necessary for the increased production now required of

them, and articles of foreign luxury for their own increased unproductive

consumption. These articles would not displace any formerly made in the

place, but on the contrary, would forward the production of more.

Hence we may consider the following propositions as established:

1. The expenditure of absentees (the case of domestic servants excepted,)

is not necessarily any loss to the _country_ which they leave, or gain to

the _country_ which they resort to (save in the manner shown in Essay I.):

for almost every _country_ habitually exports and imports to a much

greater value than the incomes of its absentees, or of the foreign

sojourners within it.

2. But sojourners often do much good to the _town_ or village which they

resort to, and absentees harm to that which they leave. The capital of

the petty tradesman in a small town near an absentee's estate, is

deprived of the market for which it is conveniently situated, and must

resort to another to which other capitals lie nearer, and where it is

consequently outbid, and gains less; obtaining only the same price, with

greater expenses. But this evil would be equally occasioned, if, instead

of going abroad, the absentee had removed to his own capital city.

If the tradesman could, in the latter case, remove to the metropolis, or

in the former, employ himself in producing increased exports, or in

producing for home consumption articles now no longer imported, each in

the place most convenient for that operation; he would not be a loser,

though the place which he was obliged to leave might be said to lose.

Paris undoubtedly gains much by the sojourn of foreigners, while the

counteracting loss by diminution of exports from France is suffered by

the great trading and manufacturing towns, Rouen, Bordeaux, Lyons, &c,

which also suffer the principal part of the loss by importation of

articles previously produced at home. The capital thus set free, finds

its most convenient seat to be Paris, since the business to which it

must turn is the production of articles to be unproductively consumed by

the sojourners.

The great trading towns of France would undoubtedly be more flourishing,

if France were not frequented by foreigners.

Rome and Naples are perhaps purely benefited by the foreigners

sojourning there: for they have so little external trade, that their

case may resemble that of the village in our hypothesis.

Absenteeism, therefore, (except as shown in the first Essay,) is a

local, not a national evil; and the resort of foreigners, in so far as

they purchase for unproductive consumption, is not, in any commercial

country, a national, though it may be a local good.

From the considerations which we have now adduced, it is obvious what

is meant by such phrases as a _brisk demand_, and a rapid circulation.

There is a brisk demand and a rapid circulation, when goods, generally

speaking, are sold as fast as they can be produced. There is slackness,

on the contrary, and stagnation, when goods, which have been produced,

remain for a long time unsold. In the former case, the capital which has

been locked up in production is disengaged as soon as the production is

completed; and can be immediately employed in further production. In the

latter case, a large portion of the productive capital of the country is

lying in temporary inactivity.

From what has been already said, it is obvious that periods of "brisk

demand" are also the periods of greatest production: the national

capital is never called into full employment but at those periods. This,

however, is no reason for desiring such times; it is not desirable that

the whole capital of the country should be in full employment. For, the

calculations of producers and traders being of necessity imperfect,

there are always some commodities which are more or less in excess, as

there are always some which are in deficiency. If, therefore, the whole

truth were known, there would always be some classes of producers

contracting, not extending, their operations. If _all_ are endeavouring

to extend them, it is a certain proof that some general delusion is

afloat. The commonest cause of such delusion is some general, or very

extensive, rise of prices (whether caused by speculation or by the

currency) which persuades all dealers that they are growing rich. And

hence, an increase of production really takes place during the progress

of depreciation, as long as the existence of depreciation is not

suspected; and it is this which gives to the fallacies of the currency

school, principally represented by Mr. Attwood, all the little

plausibility they possess. But when the delusion vanishes and the truth

is disclosed, those whose commodities are relatively in excess must

diminish their production or be ruined: and if during the high prices

they have built mills and erected machinery, they will be likely to

repent at leisure.

In the present state of the commercial world, mercantile transactions

being carried on upon an immense scale, but the remote causes of

fluctuations in prices being very little understood, so that

unreasonable hopes and unreasonable fears alternately rule with

tyrannical sway over the minds of a majority of the mercantile public;

general eagerness to buy and general reluctance to buy, succeed one

another in a manner more or less marked, at brief intervals. Except

during short periods of transition, there is almost always either great

briskness of business or great stagnation; either the principal

producers of almost all the leading articles of industry have as many

orders as they can possibly execute, or the dealers in almost all

commodities have their warehouses full of unsold goods.

In this last ease, it is commonly said that there is a general

superabundance; and as those economists who have contested the

possibility of general superabundance, would none of them deny the

possibility or even the frequent occurrence of the phenomenon which we

have just noticed, it would seem incumbent on them to show, that the

expression to which they object is not applicable to a state of things

in which all or most commodities remain unsold, in the same sense in

which there is said to be a superabundance of any one commodity when it

remains in the warehouses of dealers for want of a market.

This is merely a question of naming, but an important one, as it seems

to us that much apparent difference of opinion has been produced by a

mere difference in the mode of describing the same facts, and that

persons who at bottom were perfectly agreed, have considered each other

as guilty of gross error, and sometimes oven misrepresentation, on this

subject.

In order to afford the explanations, with which it is necessary to take

the doctrine of the impossibility of an excess of all commodities, we

must advert for a moment to the argument by which this impossibility is

commonly maintained.

There can never, it is said, be a want of buyers for all commodities;

because whoever offers a commodity for sale, desires to obtain a

commodity in exchange for it, and is therefore a buyer by the mere fact

of his being a seller. The sellers and the buyers, for all commodities

taken together, must, by the metaphysical necessity of the case, be an

exact equipoise to each other; and if there be more sellers than buyers

of one thing, there must be more buyers than sellers for another.

This argument is evidently founded on the supposition of a state of

barter; and, on that supposition, it is perfectly incontestable. When

two persons perform an act of barter, each of them is at once a seller

and a buyer. He cannot sell without buying. Unless he chooses to buy

some other person's commodity, he does not sell his own.

If, however, we suppose that money is used, these propositions cease to

be exactly true. It must be admitted that no person desires money for

its own sake, (unless some very rare cases of misers be an exception,)

and that he who sells his commodity, receiving money in exchange, does

so with the intention of buying with that same money some other commodity.

Interchange by means of money is therefore, as has been often observed,

ultimately nothing but barter. But there is this difference--that in the

case of barter, the selling and the buying are simultaneously confounded

in one operation; you sell what you have, and buy what you want, by one

indivisible act, and you cannot do the one without doing the other. Now

the effect of the employment of money, and even the utility of it, is,

that it enables this one act of interchange to be divided into two

separate acts or operations; one of which may be performed now, and the

other a year hence, or whenever it shall be most convenient. Although he

who sells, really sells only to buy, he needs not buy at the same moment

when he sells; and he does not therefore necessarily add to the

_immediate_ demand for one commodity when he adds to the supply of

another. The buying and selling being now separated, it may very well

occur, that there may be, at some given time, a very general inclination

to sell with as little delay as possible, accompanied with an equally

general inclination to defer all purchases as long as possible. This is

always actually the case, in those periods which are described as

periods of general excess. And no one, after sufficient explanation,

will contest the possibility of general excess, in this sense of the

word. The state of things which we have just described, and which is of

no uncommon occurrence, amounts to it.

For when there is a general anxiety to sell, and a general

disinclination to buy, commodities of all kinds remain for a long time

unsold, and those which find an immediate market, do so at a very low

price. If it be said that when all commodities fall in price, the fall

is of no consequence, since mere money price is not material while the

relative value of all commodities remains the same, we answer that this

would be true if the low prices were to last for ever. But as it is

certain that prices will rise again sooner or later, the person who is

obliged by necessity to sell his commodity at a low money price is

really a sufferer, the money he receives sinking shortly to its ordinary

value. Every person, therefore, delays selling if he can, keeping his

capital unproductive in the mean time, and sustaining the consequent

loss of interest. There is stagnation to those who are not obliged to

sell, and distress to those who are.

It is true that this state can be only temporary, and must even be

succeeded by a reaction of corresponding violence, since those who have

sold without buying will certainly buy at last, and there will then be

more buyers than sellers. But although the general over-supply is of

necessity only temporary, this is no more than may be said of every

partial over-supply. An overstocked state of the market is always

temporary, and is generally followed by a more than common briskness of

demand.

In order to render the argument for the impossibility of an excess of

all commodities applicable to the case in which a circulating medium is

employed, money must itself be considered as a commodity. It must,

undoubtedly, be admitted that there cannot be an excess of all other

commodities, and an excess of money at the same time.

But those who have, at periods such as we have described, affirmed that

there was an excess of all commodities, never pretended that money was

one of these commodities; they held that there was not an excess, but

a deficiency of the circulating medium. What they called a general

superabundance, was not a superabundance of commodities relatively to

commodities, but a superabundance of all commodities relatively to

money. What it amounted to was, that persons in general, at that

particular time, from a general expectation of being called upon to meet

sudden demands, liked better to possess money than any other commodity.

Money, consequently, was in request, and all other commodities were in

comparative disrepute. In extreme cases, money is collected in masses,

and hoarded; in the milder cases, people merely defer parting with their

money, or coming under any new engagements to part with it. But the

result is, that all commodities fall in price, or become unsaleable.

When this happens to one single commodity, there is said to be a

superabundance of that commodity; and if that be a proper expression,

there would seem to be in the nature of the case no particular

impropriety in saying that there is a superabundance of all or most

commodities, when all or most of them are in this same predicament.

It is, however, of the utmost importance to observe that excess of all

commodities, in the only sense in which it is possible, means only a

temporary fall in their value relatively to money. To suppose that the

markets for all commodities could, in any other sense than this, be

overstocked, involves the absurdity that commodities may fall in value

relatively to themselves; or that, of two commodities, each can fall

relatively to the other, A becoming equivalent to B-_x_, and B to A-_x_,

at the same time. And it is, perhaps, a sufficient reason for not using

phrases of this description, that they suggest the idea of excessive

production. A want of market for one article may arise from excessive

production of that article; but when commodities in general become

unsaleable, it is from a very different cause; there cannot be excessive

production of commodities in general.

The argument against the possibility of general over-production is quite

conclusive, so far as it applies to the doctrine that a country may

accumulate capital too fast; that produce in general may, by increasing

faster than the demand for it, reduce all producers to distress. This

proposition, strange to say, was almost a received doctrine as lately as

thirty years ago; and the merit of those who have exploded it is much

greater than might be inferred from the extreme obviousness of its

absurdity when it is stated in its native simplicity. It is true that if

all the wants of all the inhabitants of a country were fully satisfied,

no further capital could find useful employment; but, in that case, none

would be accumulated. So long as there remain any persons not possessed,

we do not say of subsistence, but of the most refined luxuries, and who

would work to possess them, there is employment for capital; and if the

commodities which these persons want are not produced and placed at

their disposal, it can only be because capital does not exist, disposable

for the purpose of employing, if not any other labourers, those very

labourers themselves, in producing the articles for their own consumption.

Nothing can be more chimerical than the fear that the accumulation of

capital should produce poverty and not wealth, or that it will ever take

place too fast for its own end. Nothing is more true than that it is

produce which constitutes the market for produce, and that every increase

of production, if distributed without miscalculation among all kinds of

produce in the proportion which private interest would dictate, creates,

or rather constitutes, its own demand.

This is the truth which the deniers of general over-production have

seized and enforced; nor is it pretended that anything has been added

to it, or subtracted from it, in the present disquisition. But it is

thought that those who receive the doctrine accompanied with the

explanations which we have given, will understand, more clearly than

before, what is, and what is not, implied in it; and will see that, when

properly understood, it in no way contradicts those obvious facts which

are universally known and admitted to be not only of possible, but of

actual and even frequent occurrence. The doctrine in question only

appears a paradox, because it has usually been so expressed as

apparently to contradict these well-known facts; which, however, were

equally well known to the authors of the doctrine, who, therefore, can

only have adopted from inadvertence any form of expression which could

to a candid person appear inconsistent with it. The essentials of the

doctrine are preserved when it is allowed that there cannot be permanent

excess of production, or of accumulation; though it be at the same time

admitted, that as there may be a temporary excess of any one article

considered separately, so may there of commodities generally, not in

consequence of over-production, but of a want of commercial confidence.

NOTE:

[6] Probably; because most articles of an ornamental description being

still required from the same makers, these makers, with their capital,

would probably follow their customers, Besides, from place to place

within the same country, most persons will lather change their

habitation than their employment. But the moving on this score would be

reciprocal.

Nathan Lewis

Nathan Lewis was formerly the chief international economist of a leading economic forecasting firm. He now works in asset management. Lewis has written for the Financial Times, the Wall Street Journal Asia, the Japan Times, Pravda, and other publications. He has appeared on financial television in the United States, Japan, and the Middle East. About the Book: Gold: The Once and Future Money (Wiley, 2007, ISBN: 978-0-470-04766-8, $27.95) is available at bookstores nationwide, from all major online booksellers, and direct from the publisher at www.wileyfinance.com or 800-225-5945. In Canada, call 800-567-4797.