Chapters on Practical Political Economy (1878)

A much larger collection of lecture material was published in 1878 as Chapters on Practical Political Economy (Price 1878b), running to a second edition in 1882. This covered political economy as a science, value, exchange, capital, profit, wages, trade unions, free trade and rent as well as the earlier subjects of currency and banking.

With respect to value, Price notes that ‘it lies in utility and in feeling (or want), the market value in terms of money is then the consequence of these influences: the relative interplay of wants and satisfactions between the two parties of a transaction' (ibid.: 47). Value is not an actual attribute or property of the good itself. Whilst values are commonly expressed in money terms, that is simply the result of a comparison to a common yardstick. How should value be measured independently? For this, once again, Price turns to Smith and examines the idea of a labour value, the amount of time someone would work to obtain any given item. But Price suggests that seeking any universal measure of value ‘is a dream; it has no existence' (ibid.: 58). He suggests that the existence of rent (the excess of market price over costs of production including profit)^[52] is sufficient to refute the labour-based doctrine. In the end, it is feeling that determines values but cannot ever measure them.^[53]

Nonetheless, in his letters and articles, Price continually returns to the con­cept that values are determined by the costs of production including profit: ‘[T]he value of a loaf of bread is determined by what it costs to produce' (Price in Grenfell and Price 1886: 323). Supply and demand factors may create tem­porary divergences, but in the longer run average values will reflect this fun­damental principle, or else producers would simply cease making that particular good.^[54]

Price does not reject the idea of competitive markets in determining prices, but argues that they are not sufficient to explain all the observable behaviour and variance in retail prices between different sellers at the same point in time: ‘The grand idea of constructing a science of Political Economy on a law of human nature, that men will steadily pursue what most promotes their inter­est through the agency of competition, rests on a foundation of sand' (Price 1878b: 74).

Men, in buying and selling, are not uniformly governed by the desire of making as large a gain, or saving as much money as possible, however much this prin­ciple is fondly laid down by Economists, as the foundation of their science. There are indestructible elements in human nature which come into play here as disturbing forces. Men will not uniformly buy in the cheapest though they generally strive most vigorously to sell in the dearest market (ibid.: 73—74).

Price suggests additional factors which help determine supply and demand, such as loyalty to a trader and the dislike of cheapness. The two countervailing forces are the desire and ability to buy or sell at a given price. Moreover, the desire to sell can take a crucial role, with the farmer deciding to take his stock home to sell another day. The basis of Price's whole model is that ultimately it is goods that are exchanged for other goods: ‘[P]urchasing power resides in the supply of goods' (ibid.: 90); even rents are just the share of the goods pro­duced on the landowner's farms. Thus ‘aggregate demand of any country is the quantity of goods it has to offer in exchange for others' (ibid.). If, however, a country produces more than it consumes, then there is saving and an increase in wealth. With this one exception, any increased spending in one area, whether current or capital, must reduce spending in another. From this, Price derives the idea that, for example, additional railway capital investment, not matched by saving, would have to be financed out of other capital or wealth, thus reducing overall demand. This is the essence of his over-consumption theory, that even spending on railway construction could consume wealth if it was in excess of the level of savings that the country was willing to make.

In his Contemporary Review article of 1876, Price briefly spells out his argu­ment in the form of a simple one-good, agricultural corn economy, with no stocks (see Price 1876a: 787).

There can be no multiplier effect in a simple corn economy as output is fixed by the previous year's investment in planting the seed corn and the weather; that would come solely from increased saving generating increased investment:

A young nobleman is said to have ordered twenty waistcoats, for which he had no use, under the belief that he was doing good to trade. It did not occur to him that if he had saved what they cost and lent it to a producer, there would have been the same immediate good to trade and as much profit; but there would also have been ever afterwards, an additional income of wealth for employing labourers and buying at shops (Price 1878b: 128—129).

Capital is wealth used for producing further wealth. It is thus used up and destroyed, over varying periods of time, but in doing so it produces new wealth. This distinguishes it from consumption which produces nothing new, just gratification. Land is clearly capital therefore. Labour is also logically cap­ital, though the labourer is not a capitalist (see ibid.: 107) and Price decides in the end that, for all practical purposes, labour is neither capital nor not- capital! The use of goods could be either, so corn that was milled was consumed whilst corn that was replanted was capital. Thus, Price distinguished between two sorts of consumption, productive and non-productive. He also distinguished between types of saving; hoarding was not true saving which was the applica­tion of wealth to increase production.

Similarly with capital goods, wealth is consumed, or at least tied up and made unavailable, in the initial construction of fixed assets. Its value then comes from the part that is used up in each period that contributes to the production of new goods for exchange, which can be measured in terms of depreciation, interest costs, maintenance and repairs. Capital formation thus becomes a two-edged sword. To be productive, savings must be so invested,^[55] but the over-production of capital goods has the effect of consuming wealth with no return and thus can create a depression. Over-construction takes goods out of the economy and, as a result, there are fewer things to exchange, less trade and less profit:

This excess of creation of fixed capital—of capital, be it remembered, which is destroyed, and is not, for a long time, practically restored by wealth available for use commonly follows a season of exceptional prosperity. Men are then hopeful, profits are good and abound, extension of business fascinates, trade is active, and demand for goods ever on the rise. At such times, as happened a few years ago, in the iron and coal trades, new works are commenced in profusion. All this while the consumption of the national wealth proceeds rapidly in maintain­ing many labourers and in the development of luxurious consumption in the fine weather of large profits; and it is followed by the consequences just described. Amongst these offenders none are so mischievous as railways; promoters, desir- ers of premium, stock-brokers, and many others, eagerly excite one another. The railway works are begun, and often the revulsion overtakes them before they are completed: the nation is stricken with poverty by their construction (Price 1878b: 119).

Profit is the reward for the creation of and for the employment of capital. By giving up some luxury now the capitalist is rewarded by a future higher income.

He does not deny a reward for risk taking, for example, but just does not count it to be a part of profit, in the same way that he does not deny an important role for an expansion of credit, but does not define it as a change in the quantity of money.

Price defended the role of traders: even though they create no new goods, they provide a service at a risk which deserves a margin in return: ‘By antici­pating demand, and so acting on prices, he [the trader] brings a force of great power into play. He checks consumption; he gives practical warning of the deficiency and its consequences; he diminishes waste and extravagance, and thereby enables the stock in store to hold out longer' (ibid.: 141-143).

Interest rates appear to play no part in the savings and investment discus­sion. They relate to the supply of the service of lending, together with a risk premium. Once again, Price turns to the relative feelings of the borrower and lender to explain the wide variety of rates and their fluctuations:

The character of the demander, the opinion framed of the certainty of the exchange being completed by the payment of the interest, and the repayment of the debt, are most governing factors in fixing the rate of interest.

On wages, Price also emphasised the market, and the forces of supply and demand, but he saw the outcome of this in real terms: ‘The substantial reward for his [the worker's] efforts is the goods he buys with his wages; it was to procure these goods that he sold his labour. It is a vital matter to grasp firmly that the worth of wages is not money, but what the wages can buy' (ibid.: 182). These wages are, however, paid out of capital, not from current produc­tion, that is to say from the goods previously set aside, exactly as they would be in the corn economy:

The cost of production is first provided out of the consumption of pre-existing capital. But there is, on the other hand, a real and essential connection between what industry at work produces and wages. The employer must recover from new wealth made what he had destroyed in keeping up the labour or he will give up the business... In this sense wages clearly depend on the future results of industry (ibid.: 199).

Thus, Price managed to move beyond the wages fund doctrine. Indeed, he explicitly rejected the idea of

fighting over the division of the common fund.. [W]hat one set wins the other loses... [O]ne fatal fallacy pervades this doctrine. Mr Mill, and before him Ricardo, did not know that profit was a remainder—what is left after all the charges have been paid. He did not see that wages is one of these charges. [T]he capitalist bargains for labour as he bargains for everything else (ibid.: 136—137).

Nonetheless, Price had some very Malthusian concerns about the growth of population and thus the supply of labour. Such an excess of supply of labour could not be simply made to disappear as was the case in the oversupply of goods. An excess supply of labour would have to be fed and clothed from total output, thereby lowering the average standard of living (see ibid.: 222). Decisions about marriage and childbearing were taken in the light of past economic conditions, so a few years of prosperous trade would increase the marriage rate, especially among the poorer classes. Price believed that as living standards rose, the birth rate would eventually fall, whilst emigration could also improve the balance of supply and demand more immediately, as was the case in Ireland following the potato famine (see ibid.: 226).

Price was, unsurprisingly, no supporter of restraints from either trade unions or employers, which he saw as introducing an unwanted element of antagonism into the labour market. He saw the natural working of the market as a mutual cooperation of interests for, ‘The consumers are the source from which flow all the reward, the profits and the wages; the cheaper the goods, the more of them will be bought' (ibid.: 233). Given that labourers make up the largest part of consumers, it follows that efficient labour and higher pro­duction also benefit them the most. So, restrictive practices and artificially inflated wages, costs and prices are bad policies, whereas a fair employer rewarding increased productivity out of his higher production can only ben­efit everyone. The source of this is the increase in production and thereby wealth: ‘And it must not be forgotten that, as an almost universal rule, indus­trial fortunes are not made out of a high rate of profit, but out of moderate profits earned by large operations' (ibid.: 236). What he set his hope on was enlightened mutual interest. However, Price acknowledged an important social and moral role for trade unions to improve working conditions, for example, safety, excessive hours, exploitation of female and child labour, and greater education. He noted that political economy taught quite correctly that such restraints would diminish wealth, but that would be to ignore the moral dimension, since equally he held that political economy ‘does not teach that wealth must be acquired at all costs. It nowhere denies that there are things better than wealth, and that wealth ought to be sacrificed to obtain more worthy ends, or to avert evils for which wealth can give no atonement' (ibid.: 245).

On balance, therefore, unionisation could be a potential benefit to the economy, if it avoided antagonism; then it could ease discussions about par­ticular working conditions, such as the fair rate of wages. But, in going too far beyond this role, unions could be detrimental if they called for equal treat­ment and pay regardless of ability, and other similarly restrictive practices. Money illusion prevented the unions from understanding that lower prices could encourage higher production, and that the increased quantity of goods made the stock of wealth greater for the whole population.

Turning to trade, Price reaffirmed his absolute commitment to free trade: ‘Free trade is the one subject in Political Economy which is susceptible of complete demonstration' (ibid.: 299). Nonetheless, despite the clear argu­ment for free trade having been won from Adam Smith onwards, Price laments that due to ‘renewed vigour and progress of protection in the practical world', it is necessary to argue in its favour again from first principles since, ‘Protection seems to be indestructible—a weed that no intellectual or social culture can root up—a principle that is a part of human nature itself' (ibid.: 300).

Price first disassociates the term “free trade” from the idea of a lack of gov­ernmental regulation of trade, and even from the idea of abolishing customs duties in general (which he associates instead with an argument over indirect taxation). Instead, he concentrates on the idea that free trade is the opposite of protection, and that:

Protection affirms the policy of differences of duties on the same goods. It inquires into the geographical and national origin of these goods... Free Trade is the direct contradictory of this principle. It asks no question as to where the foods were made; the same goods must be treated all alike—is its doctrine (ibid.: 302).

Price again argued from his premise of money neutrality that all trade is ultimately the exchange of goods produced. There is simply substitution of production between industries and countries: ‘Under Free Trade, foreign countries give in every case as much employment to English workmen and capitalists as if nothing had been brought abroad. English goods of the same value must be purchased by the foreigner, or the trade comes to an end' (ibid.: 307). His second argument was that of the division of labour and comparative advantage: ‘Put countries in the place of individual men. Each country, by taking a single commodity for its work to perform, makes it better and more cheaply, by the very fact that it concentrates its energy and directs its skill on one single operation' (ibid.: 308). Price makes no separate distinction between domestic trade conducted by different towns and international trade. Protection, on the other hand, reduces the consumer surplus and distorts markets through the intervention of the State (his term ‘nursery government' has quite a modern ring): ‘Protection takes from others what belongs to them, and takes it by force, by the force of law' (ibid.: 319). We have then, ulti­mately, Say's Law:

Trade is merely an exchange of goods, and it is practically unlimited if there are more goods to be exchanged on both sides. What is true of the labourer is equally true of the capitalist... The limit to the employment of capital consists in the physical difficulty of obtaining returns for its use. Capital may be applied to a field in such quantity that at last the field yields no return for it that can compensate for the effort of saving capital; but the world has many ages yet to run ere capital encounters the insuperable limit to its further accumulation (ibid.: 322).

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