4. Rationality in Economic Thought: From Thomas Robert Malthus to Alfred Marshall and Philip Wicksteed

Though the wealth of a country should be very great, yet if it has been long stationary, we must not expect to find the wages of labor very high in it. The funds destined for the payment of wages, the revenue and stock of its inhabitants, may be of the greatest extent; but if they have continued for several centuries of the same, or very nearly of the same extent, the number of laborers employed every year could easily supply, and even more than supply, the number wanted the following year. There could seldom be any scarcity of hands, nor could the masters be obliged to bid against one another in order to get them. The hands, on the contrary, would, in this case, naturally multiply beyond their employment. There would be a constant scarcity of employment, and the laborers would be obliged to bid against one another in order to get it. If in such a country the wages of labor had ever been more than sufficient to maintain the laborer, and to enable him to bring up a family, the competition of the laborers and the interest of the masters would soon reduce them to this lowest rate which is consistent with common humanity. China has been long one of the richest, that is, one of the most fertile, best cultivated, most industrious, and most populous countries in the world. It seems, however, to have been long stationary. Marco Polo, who visited it more than 500 years ago, describes its cultivation, industry, and populousness, almost in the same terms in which they are described by travelers in the present times. It had perhaps, even long before his time, acquired that full complement of riches which the nature of its laws and institutions permits it to acquire. The accounts of all travelers, inconsistent in many other respects, agree in the low wages of labor, and in the difficulty which a laborer finds in bringing up a family in China. If by digging the ground a whole day he can get what will purchase a small quantity of rice in the evening, he is contented. The condition of artificers is, if possible, still worse. Instead of waiting indolently in their work-houses, for the calls of their customers, as in Europe, they are continually running about the streets with the tools of their respective trades, offering their service, and as it were begging employment. The poverty of the lower ranks of people in China far surpasses that of the most beggarly nations in Europe. In the neighborhood of Canton many hundred, it is commonly said, many thousand families have no habitation on the land, but live constantly in little fishing boats upon the rivers and canals. The subsistence which they find there is so scanty that they are eager to fish up the nastiest garbage thrown overboard from any European ship. Any carrion, the carcass of a dead dog or cat, for example, though half putrid and stinking, is as welcome to them as the most wholesome food to the people of other countries. Marriage is encouraged in China, not by the profitableness of children, but by the liberty of destroying them. In all great towns, several are every night exposed in the street, or drowned like puppies in the water. The performance of this horrid office is even said to be the avowed business by which some people earn their subsistence (1776, Sect. I.6.5).

But it would be otherwise in a country where the funds destined for the maintenance of labor were sensibly decaying. Every year the demand for servants and laborers would, in all the different classes of employments, be less than that had been the year before. Many who had been bred in the superior classes, not being able to find employment in their own business, would be glad to seek it in the lowest. The lowest class being not only overstocked with its own workmen, but with the overflowings of all the other classes, the competition for employment would be so great in it, as to reduce the wages of labor to the most miserable and scanty subsistence of the laborer. Many would not be able to find employment even upon these hard terms, but would either starve, or be driven to seek a subsistence either by begging, or by the perpetration, perhaps, of the greatest enormities. Want, famine, and mortality would immediately prevail in that class, and from thence extend themselves to all the superior classes, till the number of inhabitants in the country was reduced to what could easily be maintained by the revenue and stock which remained in it, and which had escaped either the tyranny or calamity which had destroyed the rest. This, perhaps, is nearly the present state of Bengal, and of some other of the English settlements in the East Indies. In a fertile country which had before been much depopulated, where subsistence, consequently, should not be very difficult, and where, notwithstanding, 300,000 or 400,000 people die of hunger in 1 year, we may be assured that the funds destined for the maintenance of the laboring poor are fast decaying. The difference between the genius of the British constitution which protects and governs North America, and that of the mercantile company which oppresses and domineers in the East Indies, cannot, perhaps, be better illustrated than by the different state of those countries. The liberal reward of labor, therefore, as it is the necessary effect, so it is the natural symptom of increasing national wealth. The scanty maintenance of the laboring poor, on the other hand, is the natural symptom that things are at a stand, and their starving condition that they are going fast backwards (1776, Sect. I.8.26).

The system of equality which Mr. Godwin proposes, is, without doubt, by far the most beautiful and engaging of any that has yet appeared. An amelioration of society to be produced merely by reason and conviction, wears much more the promise of permanence, than any change effected and maintained by force. The unlimited exercise of private judgement, is a doctrine inexpressibly grand and captivating, and has a vast superiority over those systems where every individual is in a manner the slave of the public. The substitution of benevolence as the master-spring, and moving principle of society, instead of self-love, is a consummation devoutly to be wished. In short, it is impossible to contemplate the whole of this fair structure, without emotions of delight and admiration, accompanied with ardent longing for the period of its accomplishment. But, alas! that moment can never arrive. The whole is little better than a dream, a beautiful phantom of the imagination. These "gorgeous palaces" of happiness and immortality, these "solemn temples" of truth and virtue will dissolve, "like the baseless fabric of a vision," when we awaken to real life, and contemplate the true and genuine situation of man on earth (1798, Sect. X.2).

The passion between the sexes has appeared in every age to be so nearly the same that it may always be considered, in algebraic language, as a given quantity. The great law of necessity which prevents population from increasing in any country beyond the food which it can either produce or acquire, is a law, so open to our view, so obvious and evident to our understandings, and so completely confirmed by the experience of every age, that we cannot for a moment doubt it. The different modes which nature takes to prevent or repress a redundant population, do not appear, indeed, to us so certain and regular; but though we cannot always predict the mode, we may with certainty predict the fact. If the proportion of births to deaths for a few years, indicate an increase of numbers much beyond the proportional increased or acquired produce of the country, we may be perfectly certain, that unless an emigration takes place, the deaths will shortly exceed the births; and that the increase that had taken place for a few years cannot be the real average increase of the population of the country. Were there no other depopulating causes, every country would, without doubt, be subject to periodical pestilences or famine (1798, Sect. VII.11).

It is the cost of production which must ultimately regulate the price of commodities, and not, as has been often said, the proportion between the supply and demand: the proportion between supply and demand may, indeed, for a time, affect the market value of a commodity, until it is supplied in greater or less abundance, according as the demand may have increased or diminished; but this effect will be only of temporary duration (1821, Sect. 30.1).

Although the nature of rent has in the former pages of this work been treated on at some length, yet I consider myself bound to notice some opinions on the subject, which appear to me erroneous, and which are the more important, as they are found in the writings of one, to whom, of all men of the present day, some branches of economical science are the most indebted. Of Mr. Malthus's Essay on Population, I am happy in the opportunity here afforded me of expressing my admiration. The assaults of the opponents of this great work have only served to prove its strength; and I am persuaded that its just reputation will spread with the cultivation of that science of which it is so eminent an ornament. Mr. Malthus, too, has satisfactorily explained the principles of rent, and showed that it rises or falls in proportion to the relative advantages, either of fertility or situation, of the different lands in cultivation, and has thereby thrown much light on many difficult points connected with the subject of rent, which were before either unknown, or very imperfectly understood; yet he appears to me to have fallen into some errors, which his authority makes it the more necessary, while his characteristic candor renders it less unpleasing to notice. One of these errors lies in supposing rent to be a clear gain and a new creation of riches (1821, Sect. 32.1).

We must begin by settling our phraseology. Adam Smith, in a passage often quoted, has touched upon the most obvious ambiguity of the word value; which, in one of its senses, signifies usefulness, in another, power of purchasing; in his own language, value in use and value in exchange. But (as Mr. De Quincey has remarked) in illustrating this double meaning Adam Smith has himself fallen into another ambiguity. Things (he says) which have the greatest value in use have often little or no value in exchange; which is true, since that which can be obtained without labor or sacrifice will command no price, however, useful or needful it may be. But he proceeds to add, that things which have the greatest value in exchange, as a diamond for example, may have little or no value in use. This is employing the word use, not in the sense in which political economy is concerned with it, but in that other sense in which use is opposed to pleasure. Political economy has nothing to do with the comparative estimation of different uses in the judgment of a philosopher or of a moralist. The use of a thing, in political economy, means its capacity to satisfy a desire, or serve a purpose. Diamonds have this capacity in a high degree, and unless they had it, would not bear any price. Value in use, or as Mr. De Quincey calls it, teleologic value, is the extreme limit of value in exchange. The exchange value of a thing may fall short, to any amount, of its value in use; but that it can ever exceed the value in use implies a contradiction; it supposes that persons will give, to possess a thing, more than the utmost value which they themselves put upon it as a means of gratifying their inclinations (1848, Sect. III.1.3).

Four classes stand out. In each, price is governed by the relations between demand and supply. As regards market prices, “supply” is taken to mean the stock of the commodity in question which is on hand, or at all events "in sight." As regards normal prices, when the term Normal is taken to relate to short periods of a few months or a year, Supply means broadly what can be produced for the price in question with the existing stock of plant, personal and impersonal, in the given time. As regards normal prices, when the term Normal is to refer to long periods of several years, supply means what can be produced by plant, which itself can be remuneratively produced and applied within the given time; while lastly, there are very gradual or secular movements of normal price, caused by the gradual growth of knowledge, of population and of capital, and the changing conditions of demand and supply from one generation to another (1890, Sect. V.V.38).

On the other side of the line of division are periods of time long enough to enable producers to adapt their production to changes in demand, in so far as that can be done with the existing provision of specialized skill, specialized capital, and industrial organization; but not long enough to enable them to make any important changes in the supplies of these factors of production. For such periods, the stock of material and personal appliances of production have to be taken in a great measure for granted; and the marginal increment of supply is determined by estimates of producers as to the amount of production it is worth their while to get out of those appliances. If trade is brisk, all energies are strained to their utmost, overtime is worked, and then the limit to production is given by want of power rather than by want of will to go further or faster. But if trade is slack, every producer has to make up his mind how near to prime cost it is worth his while to take fresh orders. And here, there is no definite law, the chief operative force is the fear of spoiling the market; and that acts in different ways and with different strengths on different individuals and different industrial groups. For the chief motive of all open combinations and of all informal silent and "customary" understandings whether among employers or employed is the need for preventing individuals from spoiling the common market by action that may bring them immediate gains, but at the cost of a greater aggregate loss to the trade (1890, Sect. V.XV.7).

For instance, while custom in a primitive society extends the limits of the family, and prescribes certain duties to one's neighbors which fall into disuse in a later civilization, it also prescribes an attitude of hostility to strangers. In a modern society, the obligations of family kindness become more intense, though they are concentrated on a narrower area; and neighbors are put more nearly on the same footing with strangers. In ordinary dealings, with both of them the standard of fairness and honesty is lower than in some of the dealings of a primitive people with their neighbors: but it is much higher than in their dealings with strangers. Thus, it is the ties of neighborhood alone that have been relaxed; the ties of family are in many ways stronger than before, family affection leads to much more self-sacrifice and devotion than it used to do; and sympathy with those who are strangers to us is a growing source of a kind of deliberate unselfishness, that never existed before the modern age. That country which is the birthplace of modern competition devotes a larger part of its income than any other to charitable uses, and spent 20 millions on purchasing the freedom of the slaves in the West Indies (1890, Sect. I.I.16).

Everyone who is worth anything carries his higher nature with him into business; and, there as elsewhere, he is influenced by his personal affections, by his conceptions of duty and his reverence for high ideals. And it is true that the best energies of the ablest inventors and organizers of improved methods and appliances are stimulated by a noble emulation more than by any love of wealth for its own sake. But, for all that, the steadiest motive to ordinary business work is the desire for the pay which is the material reward of work. The pay may be, on its way, to be spent selfishly or unselfishly, for noble or base ends; and here, the variety of human nature comes into play 1890, Sect. I.II.1).

But, the motive is supplied by a definite amount of money: and it is this definite and exact money measurement of the steadiest motives in business life, which has enabled economics far to outrun every other branch of the study of man. Just as the chemist's fine balance has made chemistry more exact than most other physical sciences, so as this economist's balance, rough and imperfect as it is, has made economics more exact than any other branch of social science. But, of course, economics cannot be compared with the exact physical sciences: for it deals with the ever changing and subtle forces of human nature (1890, Sect. I.II.1).

The laws of economics are to be compared with the laws of the tides, rather than with the simple and exact law of gravitation. For the actions of men are so various and uncertain, that the best statement of tendencies, which we can make in a science of human conduct, must need be inexact and faulty. This might be urged as a reason against making any statements at all on the subject; but that would be almost to abandon life. Life is human conduct, and the thoughts and emotions that grow up around it. By the fundamental impulses of our nature we all – high and low, learned and unlearned – are in our several degrees constantly striving to understand the courses of human action, and to shape them for our purposes, whether selfish or unselfish, whether noble or ignoble. And since we must form to ourselves some notions of the tendencies of human action, our choice is between forming those notions carelessly and forming them carefully. The harder the task, the greater the need for steady patient inquiry; for turning to account the experience, that has been reaped by the more advanced physical sciences; and for framing as best we can well thought-out estimates, or provisional laws, of the tendencies of human action (1890, Sect. I.III.10).

The ordinary method of presenting the demand curve in two sections tells us the extent to which the present distribution of the commodity departs from that of equilibrium, and therefore the extent of the transactions that will be required to reach equilibrium. But, it is the single combined curve alone that tells us what the equilibrium price will be. The customary representation of cross curves confounds the process by which the price is discovered with the ultimate facts that determine it.

And yet the ground on which this stubborn prejudice rests is obvious enough, and the example of the apostolic tent-maker has already suggested it. We have seen that although Paul was certainly not thinking of himself or of his own advantage when he was making tents in Corinth, yet neither was he necessarily or even probably thinking, in any disinterested or enthusiastic manner, of the advantage of those for whom he was working and whose wants he was immediately supplying. In his attitude towards himself and “others” at large, a man may be either selfish or unselfish without affecting the economic nature of any given relation, such as that of Paul to his customers; but as soon as he is moved by a direct and disinterested desire to further the purposes or consult the interests of those particular “others” for whom he is working at the moment, then in proportion as this desire becomes an ultimate object to him (so that he is directly fulfilling one of his own purposes in supplying these wants) the transaction on his side ceases to be purely economic. No doubt Paul took conscientious pains with his tent-making. So far as this was with a view to business, it was done in obedience to an economic force. So far as it was an expression of his own personality or of his independent sympathy with his employers, it was not. If you and I are conducting a transaction which on my side is purely economic, I am furthering your purposes, partly or wholly, perhaps, for my own sake, perhaps, entirely for the sake of others, but certainly not for your sake. What makes it an economic transaction is that I am not considering you except as a link in the chain, or considering your desires except as the means by which I may gratify those of someone else – not necessarily myself. The economic relation does not exclude from my mind everyone but me; it potentially includes everyone but you. You it does indeed exclude, and therefore it emphasizes, though it does not narrow or tighten, the limitations of the altruism of the man who enters into it; for it calls our attention to the fact that, however wide his sympathies may be, they do not urge him to any particular effort or sacrifice for the sake of the person with whom he is dealing at the moment. An economic relation may be entered upon equally well from egoistic or altruistic motives; but as long as it remains purely economic, it must remind us that no man’s altruism is undiscriminating to the extent of lavishing itself upon all persons or all purposes at all times. Short of this, clearly the most altruistic person may enter into a relation with another man, the purpose of which is to further the good of those who are other than himself, and also other than the person with whom he is dealing. In that case, his action is altruistic because it is inspired by a desire for the good of someone other than himself, and the relation is economic because it is entered into for the sake of someone other than his correspondent (1910, p. 173).