In Political Economy, as in other sciences, a careful study of method is an absolute necessity. And this subject of method will come into special prominence in the present lecture, because we have now to consider the writings of a man of extraordinary intellect and force, who, beyond any other thinker, has left the impress of his mind on economic method. Yet even he would have been saved from several fallacies, if he had paid more careful attention to the necessary limitations of the method which he employed. It may be truly said that David Ricardo has produced a greater effect even than Adam Smith on the actual practice of men as well as on the theoretical consideration of social problems. His has been at once the great prop of the middle classes, and their most terrible menace; the latter, because from it have directly sprung two great text- of Socialism, Das Kapital of Karl Marx, and the Progress and Poverty of Mr Henry George. And yet for thirty or forty years Ricardo's writings did more than those of any other author to justify in the eyes of men the existing state of society.
Ricardo's life has little in it of external interest. He made his fortune on the Stock Exchange by means of his great financial abilities, and then retired and devoted himself to literature. During the few years that he sat in Parliament, he worked (we have it on Huskisson's testimony) a great change in the opinions of legislators, even in those of the country squires-a remarkable fact, since his speeches are highly abstract, and contain few allusions to current politics, reading in fact like chapters from his We may notice one direct effect of his speeches: they were the most powerful influence in determining the resumption of cash payments. In his private life he associated much with Bentham and James Mill.
James Mill, like Bentham and Austin, was a staunch adherent of the deductive method, and it was partly through Mill's influence that Ricardo adopted it. Mill was his greatest friend; it was he who persuaded him both to go into Parliament, and to publish his great Ricardo's political opinions in fact merely reflect those of James Mill, and the other philosophical Radicals of the time, though in Political Economy he was their teacher. Ricardo reigned without dispute in English Economics from 1817 to 1848, and though his supremacy has since then been often challenged, it is by no means entirely overthrown. His influence was such that his method became the accepted method of economists; and to understand how great the influence of method may be, you should turn from his writings and those of his followers to Adam Smith, or to Sir Henry Maine, where you come in contact with another cast of mind, and will find yourselves in a completely different mental atmosphere. Now what is this deductive method which Ricardo employed? It consists in reasoning from one or two extremely simple propositions down to a series of new laws. He always employed this method, taking as his great postulate that all men will on all matters follow their own interests. The defect of the assumption lies in its too great simplicity as a theory of human nature. Men do not always know their own interest. Bagehot points out that the *10 householders, who were enfranchised by the first Reform Bill, were after 1832 the most heavily taxed class in the community, though the remedy was in their own hands; because they were ignorant and apathetic. And even when men know their interests, they will not always follow them; other influences intervene, custom, prejudice, even fear. Cairnes frankly admits these defects in Ricardo's method; but it took economists some thirty or forty years to learn the necessity of testing their conclusions by facts and observations. Since 1848 their attitude has improved; it is now seen that we must insist upon the verification of our premisses, and examine our deductions by the light of history.
Ricardo has deduced from very simple data a famous law of industrial progress. In an advancing community, he says, rent must rise, profits fall, and wages remain about the same. We shall find from actual facts that this law has been often true, and is capable of legitimate application, though Mr Cliffe-Leslie would repudiate it altogether; but it cannot be accepted as a universal law. The historical method, on the other hand, is impotent of itself to give us a law of progress, because so many of the facts on which it relies are, in Economics, concealed from us. By the historical method we mean the actual observation of the course of economic history, and the deduction from it of laws of economic progress; and this method, while most useful in checking the results of deduction is, by itself, full of danger from its tendency to set up imperfect generalisations. Sir H. Maine and M. Laveleye, for instance, have taken an historical survey of land-tenure, and drawn from it the conclusion that the movement of property in land is always from collective to individual ownership; and Mr Ingram, again, alluding to this law, accepts it as true that there is a natural tendency towards private property in land. He can build his argument on the universal practice from Java to the Shetlands, and it would seem a legitimate conclusion that the tendency will be constant. Yet there is at the present day a distinct movement towards replacing private by collective ownership, due to the gradual change in the opinions of men as to the basis on which property in land should rest. Mill, in 1848, argued that where the cultivator was not also the owner, there was no justification for private ownership; later in his life, he advocated the confiscation of the unearned increment in land. If we ask, 'Was he right?' the answer must be: Every single institution of society is brought to the test of utility and general national well-being; hence, private property in land, if it fails under this test, will not continue. So too with the rate of interest: older economists have insisted on the necessity of a certain rate, in order to encourage the accumulation of capital; but we may fairly ask whether the rate of remuneration for the use of capital is not too high-whether we could not obtain sufficient capital on easier terms? These considerations show that, in predicting the actual course of industrial progress, we must not be content to say that because there has been a movement in a certain direction in the past-for example, one from status to contract-it will therefore continue in the future. We must always apply the test, Does it fit in with the urgent present requirements of human nature?
Ricardo's influence on legislation, to which I have already alluded, was twofold; it bore directly upon the special subject of currency and finance; and, what is more remarkable, it affected legislation in general. As regards finance, his pamphlets are the real justification of our monetary system, and are still read by all who would master the principles of currency. With respect to other legislation, he and his friends have the great credit of having helped to remove not merely restrictions on trade in general, but those in particular which bore hardest on the labourer. When Joseph Hume, in 1824, proposed the repeal of the Combination Laws, he said he had been moved thereto by Ricardo. But though Ricardo advocated the removal of restrictions which injured the labourer, he deprecated all restrictions in his favour; he ridiculed the Truck Acts, and supported the opposition of the manufacturers to the Factory Acts - an opposition which, be it remembered, though prompted by mere class interest, was also supported in the name and on the then accepted principles of economic science.
In this way Ricardo became the prop, as I have called him, of the middle classes. Throughout his treatise there ran the idea of natural law, which seemed to carry with it a sort of justification of the existing constitution of society as inevitable. Hence his doctrines have proved the readiest weapons wherewith to combat legislative interference or any proposals to modify existing institutions. Hence, too, his actual conclusions, although gloomy and depressing, were accepted without question by most of his contemporaries. Another school, however, has grown up, accepting his conclusions as true under existing social conditions, but seeing through the fallacy of his 'natural law.' These are the Socialists, through whom Ricardo has become a terror to the middle classes. The Socialists believe that, by altering the social conditions which he assumed to be unalterable, Ricardo's conclusions can be escaped. Karl Marx and Lassalle have adopted Ricardo's law of wages; but they have argued that, since by this law wages, under our present social institutions, can never be more than sufficient for the bare subsistence of the labourer, we are bound to reconsider the whole foundation of society. Marx also simply accepts Ricardo's theory of value. The value of products, said Ricardo, is determined by the quantity of the labour expended on them; and Marx uses this statement to deduce the theorem that the whole value of the produce rightly belongs to labour, and that by having to share the produce with capital the labourer is robbed.
Mr Henry George, again, the latest Socialist writer, is purely and entirely a disciple of Ricardo. The whole aim of his treatise, Progress and Poverty, is to prove that rent must rise as society advances and wealth increases. It is not the labourer, Ricardo reasoned, who will be the richer for this progress, nor the capitalist, but the owner of land. Mr George's theory of progress is the same. Putting aside his attempt to show a connection between the laws of interest and wages, which he contends will rise and fall together, there is little difference between his conclusions and Ricardo's. Others before Mr George had clearly enough seen this bearing of the law of rent. Roesler, the German economist, says: 'Political Economy would only be a theory of human degradation and impoverishment, if the law of rent worked without modification.'
Now let us see what are the assumptions on which Ricardo grounded his law about the course of rent, wages, and profits in a progressive community. The pressure of population, he argued, makes men resort to inferior soils; hence the cost of agricultural produce increases, and therefore rent rises. But why will profits fall? Because they depend upon the cost of labour, and the main element in determining this is the cost of the commodities consumed by the workmen. Ricardo assumes that the standard of comfort is fixed. If, therefore, the cost of a quartern loaf increases, and the labourer is to obtain the same number of them, his wages must rise, and profits therefore must fall. Lastly, why should wages remain stationary? Because, assuming that the labourer's standard of comfort is fixed, a rise of wages or a fall in prices will only lead to a proportionate increase of population. The history of the theory of rent is very interesting, but it is out of our r so I can only lightly touch upon it. Adam Smith had no clear or consistent theory at all on the subject, and no distinct views as to the relation between rent and price. The modern doctrine is first found in a pamphlet by a practical farmer named James Anderson, published in 1777, the year after the appearance of The Wealth of Nations; but it attracted little attention till it was simultaneously re-stated by Sir Edward West, and by Malthus in his pamphlet on the Corn Laws. Had the theory, however, been left in the shape in which they stated it, it would have had little influence. It was Ricardo, who, pUzzled by the question of rent, snatched at the theory, and gave it currency by embodying it in his whole doctrine of value and of economic development.
Ricardo's two great positive conclusions are: first, that the main cause of rent is the necessity of cultivating inferior soil as civilisation advances; and secondly, that rent is not the cause but the result of price. The theory has been disputed and criticised, but nearly all the objections have come from persons who have not understood it. We may say conclusively that, as a theory of the causes of rent, apart from that general doctrine of industrial development of which in Ricardo it forms a part, the theory is true. The one formidable objection which can be urged against it is that the rise in rents in modern times has been due not so much to the necessity of resorting to inferior soils, as to improvements in agriculture; but when Professor Thorold Rogers attacks the theory on this ground, he merely proves that Ricardo has overlooked some important causes which have led to an increase of rents since the Middle Ages.
What, then, are we justified in stating to be the ultimate causes of rent? First, the fertility of the soil and the skill of the cultivator, by which he is able to raise a larger produce than is necessary for his own subsistence; this makes rent physically possible. Next, the fact that land is limited in quantity and quality; that is, that the supply of the land most desirable from its situation and fertility is less than the demand: this allows of rent being exacted. The early colonists in America paid no rent, because there was an abundance of land open to every one; but twenty years later, rent was paid because population had grown. Let us see exactly what happens in such a case. A town is founded on the sea-coast; as it grows, the people in that town have to get some of their food from a distance. Assume that the cost of raising that corn and bringing it to the town is 20s., and that the cost of raising it close to the town is 15s. for every five bushels (we will suppose that in the latter instance the cost of carriage is nil); then, as both quantities will be sold at the same price, the surplus 5s. In the latter case will go for rent. Thus we find that rent has arisen because corn is brought into the market at different costs. In twenty years more, rents will have risen still further, because soils still more inferior in fertility or situation will have been brought into cultivation. But the rise of rent is not directly due to the cultivation of inferior soils; the direct cause is the increase of population which has made that cultivation necessary.
Going back to the question raised by Professor Rogers, as to the effect of agricultural improvements on rent, we may notice that the controversy on this question was first fought out between Ricardo and Malthus. Ricardo thought that improvements would lead to a fall in rents; Malthus maintained the opposite, and he was right. Take an acre of land close to the town, such as we were considering above, with an original produce of five bushels of wheat, but which, under improved cultivation, yields forty bushels. If the price of wheat remains the same, and all the land under cultivation has been improved to an equivalent extent, the rent will now be 5s. multiplied by eight. Yet there are a few historical instances where agricultural improvements have been followed by a fall in rents. For instance, during the Thirty Years' War the Swiss supplied Western Germany with corn, and introduced improvements into their agriculture, in order to meet the pressure of the demand. After the peace of Westphalia the demand fell off; the Swiss found they were producing more than they could sell; prices fell, and, as a consequence, rents fell also.
Professor Rogers has further objected to Ricardo's theory that it does not explain the historical origin of rent. The term 'rent' is ambiguous; it has been used for the payment of knight-service, for the performances of religious offices, for serfs' labour and the sum of money for which it was commuted. In Ricardo's mouth it meant only the money rent paid by a capitalist farmer, expecting the usual rates of profits; but it is quite true that these modern competition rents did not arise till about the time of James I.
The last point in the theory of rent is the relation between rent and price. Before Ricardo's time most practical men thought that rent was a cause of price. Ricardo answered, There is land cultivated in England which pays no rent, or at least there is capital employed in agriculture which pays none; therefore there is in the market corn which has paid no rent, and it is the cost of raising this corn, which is grown on the poorest land, that determines the price of all the corn in the same market. Probably he was right in his statement that there is land in England which pays no rent; but even if all land and all farmers' capital paid rent, it would not affect the argument, which says that rent is not the cause but the result of price. We may conclude that at the present day rent is determined by two things: the demand of the population, and the quantity and quality of land available. These determine it by fixing the price of corn.
Now let us turn to facts, to see how our theories work. We will take the rise in rents between 1790 and 1830, and ask how it came about. The main causes were - (1) improvements in agriculture, the chief of which were the destruction of the commonfield system, rendering possible the rotation of crops, the consolidation of farms with the farmhouse in the centre of the holding, and the introduction of machinery and manures; (2) the great growth of population, stimulated by mechanical inventions; (3) a series of bad harvests, which raised the price of corn to an unparalleled height; (4) the limitation of supply, the population having to be fed with the produce of England itself, since, during the first part of the period all supplies from abrwere cut off by war, and later, higher and higher protective duties were imposed, culminating in the famous corn bill of 1815. After 1815, however, a fall in rents - not a very great one-took place, a process which greatly puzzled people at the time. It was the consequence of a sudden coincidence of agricultural improvements and good harvests; there was for a time an over production of corn, and wheat fell in price from 90s. to 35s. This fact is the explanation of Ricardo's mistaken idea that agricultural improvements tend to reduce rents. Having no historical turn of mind, such as Malthus had, he did not recognise that this effect of agricultural improvements was quite accidental. This case, indeed, and the instance of Switzerland given above, with the similar events in Germany about 1820, are the only historical examples of such an effect. For a time there was great agricultural distress; the farmers could not get their rents reduced in proportion to the fall in prices, and many, in spite of the enormous profits they had before made under beneficial leases, were ruined; the farming class never wholly recovered till the repeal of the Corn Laws. But the fall was temporary and exceptional. Taking the period as a whole its striking feature is the rise of rents, and this rise was due to the causes stated: increased demand on the part of an increased population, and limitation of quantity, with improved quality, of the land available.
I have hitherto been considering the theory of agricultural rents; I now pass to a subject of perhaps greater present importance - ground-rents in towns. If the rise in the rent of agricultural lands has been great, the rise in that of urban properties has been still more striking. A house in Lombard Street, the property of the Drapers' Company, was in 1668 let for *25; in 1887 the site alone was let for *2600. How do we account for this? It is the effect of the growth of great towns and of the improvements which enable greater wealth to be produced in them, owing to the development of the arts, and to the extension of banking and credit. Are town rents then a cause of the rise in prices? Certainly not. Rent may be an element in price, but the actual amount of rent paid depends upon these two things: the demand of the population for commodities, which determines price, and the value of a particular site for purposes of business.
These considerations bring us to the question now sometimes raised: is rent a thing which the State can abolish? Is it a human institution, or the result of physical causes beyond our control? If we abolish agricultural rent, the result would simply be, as Ricardo says, that the rent would go into the pockets of the farmers, and some of them would live like gentlemen. Rent itself is the result of physical causes, but it is within our power to say who shall receive the rent. This seems a fact of immense importance, but the extent of its significance depends largely on the future course of rent in England; and so we are bound to inquire whether Ricardo was right in assuming that rents must necessarily rise in a progressing state. Many think the contrary, and that we are now on the eve of a certain and permanent fall in agricultural rents; and if rents continue steadily to fall, the question will become one of increasing insignificance. As means of communication improve, we add more and more to the supply of land available for satisfying the wants of a particular place; and as the supply increases, which it is likely to do to an increasing extent, the price of land must fall. Social causes have also influenced rents in England, and social changes are probably imminent, which will at once reduce the value of land for other than agricultural purposes, and increase the amount of it devoted to agriculture. Such changes would likewise tend to diminish rent. We may say therefore that, since there are these indications of a permanent fall in rents, so great a revolution as the transference of rent from the hands of private owners to the nation would not be justified by the amount which the nation would acquire. The loss and damage of such a revolution would not be adequately repaid.
But will rent in towns fall? Here it is impossible to predict. For instance, we cannot say whether London will continue to grow as rapidly as it has done heretofore. Now it is the monetary centre of the world; owing to the greater use of telegraphy, it is possible that it may not retain this pre-eminence. The decay of the provincial towns was largely due to the growth of great estates, which enabled their proprietors to live and spend in London; but if changes come to break up these large properties, London will cease to be the centre of fashion, or at any rate to have such a large fashionable population. Politics, moreover, are certainly tending to centre less in London. And further inventions in the means of locomotion and the greater use of electricity may result in causing a greater diffusion of population.
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