Principles of Economics

By Alfred Marshall

Economic conditions are constantly changing, and each generation looks at its own problems in its own way. In England, as well as on the Continent and in America, Economic studies are being more vigorously pursued now than ever before; but all this activity has only shown the more clearly that Economic science is, and must be, one of slow and continuous growth. Some of the best work of the present generation has indeed appeared at first sight to be antagonistic to that of earlier writers; but when it has had time to settle down into its proper place, and its rough edges have been worn away, it has been found to involve no real breach of continuity in the development of the science. The new doctrines have supplemented the older, have extended, developed, and sometimes corrected them, and often have given them a different tone by a new distribution of emphasis; but very seldom have subverted them…. [From the Preface to the First Edition]

Book Cover

First Pub. Date

1890

Publisher

London: Macmillan and Co., Ltd.

Pub. Date

1920

Comments

8th edition

Copyright

The text of this edition is in the public domain.

RICARDO’S DOCTRINE AS TO TAXES AND IMPROVEMENTS IN AGRICULTURE.

APPENDIX L
*101

Much has already been said about the excellent of Ricardo’s thought and the imperfections of his expression of it, and in particular notice has been taken of the causes which led him to lay down the law of diminishing return without proper qualifications. Similar remarks apply to his treatment of the influence of improvements and the incidence of taxes in agriculture. He was especially careless in his criticisms of Adam Smith; and as Malthus justly said (Summary of Section X. of his
Political Economy), “Mr Ricardo, who generally looks to permanent and final results, has always pursued an opposite policy in reference to the rents of land. It is only by looking to temporary results, that he could object to Adam Smith’s statement, that the cultivation of rice or of potatoes would yield higher rent than corn.” And Malthus was perhaps not far wrong when he added:—”Practically, there is reason to believe that, as a change from corn to rice must be gradual, not even a temporary fall of rent would take place.”

Nevertheless, in Ricardo’s time it was of great practical importance to insist, and it is of much scientific interest even now to know, that in a country which cannot import much corn, it is very easy so to adjust taxes on cultivation and so to hinder improvements as to enrich the landlords for a time and to impoverish the rest of the people. No doubt when the people had been thinned by want, the landlords would suffer in pocket: but that fact took little of the force from Ricardo’s contention that the enormous rise of agricultural prices and rents which occurred during his life was an indication of an injury to the nation beyond all comparison greater than the benefits received by the landlords. But let us now pass in review some of those arguments in which Ricardo delighted to start from sharply defined assumptions, so as to get clear net results, which would strike the attention; and which the reader might combine for himself so as to make them applicable to the actual facts of life.

Let us first suppose that the “Corn” raised in a country is absolutely necessary;
i.e. that the demand for it has no elasticity, and that any change in its marginal cost of production would affect only the price that people paid for it, and not the amount of it consumed. And let us suppose that no Corn is imported. Then the effect of a tax of one-tenth on Corn would be to cause its real value to rise till nine-tenths as much as before would suffice to remunerate the marginal dose, and therefore every dose. The gross Corn surplus on every piece of land would therefore remain the same as before; but one-tenth being taken away as a tax, the remainder would be nine-tenths of the old Corn surplus. Since, however, each part of it would have risen in real value in the ratio of ten to nine, the real surplus would remain unchanged.

But the assumption that the demand for produce is absolutely inelastic is a very violent one. The rise in price would in fact be sure to cause an immediate falling-off in the demand for some kinds of produce, if not for the staple cereals: and therefore the value of Corn,
i.e. produce in general, would never rise in full proportion to the tax, and less capital and labour would be applied in the cultivation of all lands. There would thus be a diminution in the Corn surplus from all lands, but not in the same proportion from all; and since a tenth of the Corn surplus would be taken by the tax, while the value of each part of it would have risen in less than the ratio of ten to nine, there would be a double fall in the real surplus. (The diagrams on page 158 suggest at once translations of those reasonings into the language of geometry.)

The immediate fall would be very great under modern conditions in which free importation of Corn prevents its real value from being much raised by the tax; and the same result would follow gradually, even in the absence of importation, if the rise in its real value diminished the numbers of the people; or, what is at least as probable, if it had the effect of lowering the standard of living, and the efficiency of the working population. These two effects would operate very much in the same way on the producer’s surplus; both would make labour dear to the employer, while the latter would also make real time wages low to the worker.

Ricardo’s reasonings on all these questions are rather difficult to follow: because he often gives no hint when he ceases to deal with results which are “immediate,” and belong to a “short period” relatively to the growth of population; and passes to those which are “ultimate,” and belong to a “long period” in which the labour value of raw produce would have time materially to affect the numbers of the people and therefore the demand for raw produce. When such interpreting clauses are supplied, very few of his reasonings will be found invalid.

We may now pass to his argument with regard to the influence of improvements in the arts of agriculture, which he divides into two classes. A special scientific interest attaches to his treatment of the first, which consists of those improvements that “I can obtain the same produce with less capital, and without disturbing the difference between the productive powers of the successive portions of capital
*102“; of course neglecting for the purpose of his general argument the fact that any given improvement may be of greater service to one particular piece of land than another. (See above, Book IV. ch. III. § 4.) Assuming as before that the demand for Corn has no elasticity, he proved that capital would be withdrawn from the poorer lands (and from the more intensive cultivation of the richer lands), and therefore the surplus measured in Corn, the Corn surplus—as we may say—obtained by applications of capital under the most favourable circumstances, will be a surplus relatively to lands not so poor as those which were on the margin of cultivation before; and the differential productiveness of any two applications of capital remaining, by hypothesis, unchanged, the Corn surplus must necessarily fall, and of course the real value and the labour value of the surplus will fall much more than in proportion.

This may be made clear by the adjoining figure; in which curve
AC represents the return which the land of the whole country, regarded as one farm, makes to doses of capital and labour applied to it, these doses being arranged not in the order of their application, but in that of their productiveness. In equilibrium
OD doses are applied, the price of the Corn being such that a return
DC is just sufficient to remunerate a dose; the whole amount of Corn raised being represented by the area
AODC, of which
AHC represents the aggregate Corn surplus. [We may pause to notice that the only change in the interpretation of this diagram which is required by our making it refer to the whole country instead of a single farm, arises from our not being able now, as we could then, to suppose that all the several doses of capital are applied in the same neighbourhood, and that therefore the values of equal portions (of the same kind) of produce are equal. We may however get over this difficulty by reckoning the expenses of transporting the produce to a common market as part of its expenses of production; a certain part of every dose of capital and labour being assigned to the expenses of transport.]

Now an improvement of Ricardo’s first class will increase the return to the dose applied under the most favourable conditions from
OA to
OA‘, and the returns to other doses, not in like
proportion, but by equal
amounts. The result is that the new produce curve
A‘
C‘ will be a repetition of the old produce curve
AC, but raised higher than it by the distance
AA‘. If, therefore, there were an unlimited demand for corn, so that the old number of doses,
OD, could be profitably applied, the aggregate Corn surplus would remain the same as before the change. But in fact such an immediate increase of production could not be profitable; and therefore an improvement of this kind must necessarily lessen the aggregate Corn surplus. And on the assumption made here by Ricardo that the aggregate produce is not increased at all, only
OD‘ doses will be applied,
OD‘ being determined by the condition that
A‘
OD‘
C‘ is equal to
AODC; and the aggregate Corn surplus will shrink down to
A‘
H‘
C‘. This result is independent of the shape of
AC; and, which is the same thing, of the particular figures selected for the numerical illustration which Ricardo used in proof of his argument.

And here we may take the occasion to remark that numerical instances can as a rule be safely used only as illustrations and not as proofs: for it is generally more difficult to know whether the result has been implicitly assumed in the numbers shown for the special case than it is to determine independently whether the result is true or not. Ricardo himself had no mathematical training. But his instincts were unique; and very few trained mathematicians could tread as safely as he over the most perilous courses of reasoning. Even the acute logical mind of Mill was unequal to the task.

Mill characteristically observed that it is much more probable that an improvement would increase the returns to capital applied to different classes of land in equal proportions than by equal amounts. (See his second case,
Political Economy, Book IV. ch. III. § 4.) He did not notice that by so doing he cut away the basis of Ricardo’s sharply defined argument, which was that the change did not alter the differential advantages of different applications of capital. And though he arrived at the same result as Ricardo, it was only because his result was implicitly contained in the numbers he chose for his illustration.

The adjoining figure tends to show that there is a class of economic problems which cannot be safely treated by anyone of less genius than Ricardo without the aid of some apparatus, either of mathematics or of diagrams, that present as a continuous whole the schedules of economic forces, whether with regard to the Law of Diminishing Return or to those of Demand and Supply. The curve
AC has the same interpretation in this figure as in the last; but the improvement has the effect of increasing the return to each dose of capital and labour by one-third,
i.e. in an equal proportion and not by an equal amount: and the new produce curve
A‘
C‘ stands much higher above
AC at its left end than at its right. Cultivation is restricted to
OD‘ doses, where the area
A‘
OD‘
C‘, representing the new aggregate product, is as before equal to
AODC; and
A‘
H‘
C‘ is as before the new aggregate Corn surplus. Now it can be easily proved that
A‘
H‘
C‘ is four-thirds of
AKE, and whether this is greater or less than
AHC depends upon the particular shape assigned to
AC. If
AC be a straight line or nearly a straight line (both Mill’s and Ricardo’s numbers represented points on a straight Produce line)
A‘
H‘
C‘ would be less than
AHC; but with the shape assigned to
AC in our figure
A‘
H‘
C‘ is greater than
AHC. And thus Mill’s argument is, while Ricardo’s is not, dependent for its conclusion on the particular shape assumed by them for the gross produce curve.

(Mill assumes that the cultivated part of a country consists of three quantities of land, yielding at an equal expense 60, 80, and 100 bushels; and he then shows that an improvement which increased the return to each dose of capital by one-third, would lower corn rents in the ratio of 60 to 26 2/3. But if he had taken the distribution of fertility in a country to be such that the land consisted of three qualities yielding at an equal expense 60, 65, and 115 bushels, as is done roughly in our figure, he would have found in that case the improvement would raise corn rents in the ratio 60 to 66 2/3.)

Finally it may be noticed that Ricardo’s paradox as to the possible effects of improvements on the rent of land is applicable to urban as well as agricultural land. For instance, the American plan of building stores sixteen stories high with steel frames, and served with elevators, may be supposed suddenly to become very efficient, economical and convenient in consequence of improvements in the arts of building, lighting, ventilation and the making of elevators. In that case the trading part of each town would occupy a less area than now; a good deal of land would have to revert to less remunerative uses; and the net result might possibly be a fall in the aggregate site values of the town.

101.

Compare VI. IX. 4.

102.

Ch. II.
Collected Works, p. 42. Comp. Cannan’s
Production and Distribution, 1776-1848, pp. 325-6. Ricardo’s distinction between his two classes of improvements is not altogether happy, and need not be considered here.

Categories: Alfred Marshall