On Profits and Wages.

105

to the other. This doctrine, which seemed to show that the state of society must necessarily deteriorate with the increase of numbers, led a caustic philosopher of the present day to nickname Political Economy the 'dismal' science.

But a few sentences will dissipate these gloomy ideas and will show by the simplest arithmetical calculation that Profits and Wages may very well rise together.

It is quite easy to show that Wages may be increased, actual Profit diminished, and yet the Rate of Profit greatly increased.

Suppose, as before, the Capital is 100l., and the Profit 20%. made in a year: the Wages being a certain amount.

Suppose that the period of making the Profit is reduced to a month; then the Rate of Profit is 240 per cent. per annum.

Suppose that, in consequence of making the greater Profit, the Capitalist advances Wages 57. Then the Cost of Production is 105., and the Profit is 157. made in one month or nearly 14.3 per cent. per month which is Profit at the Rate of more than 167 per cent. per annum.

Suppose a still more accelerated sale, and that the trader makes the Profit in a week, which is a Profit at the Rate of 1,040 per cent. per annum.

Suppose that the trader, in consequence of this greatly increased Rate of Profit, raises Wages, so that Cost of Production amounts to 110l. Then with an outlay of 110/. he makes a Profit of 10l. in one week: being more than 9 per cent. per week; or more than 468 per cent. per annum.

Suppose a still more accelerated sale, and that the trader makes the Profit in one day and suppose that, in consequence of this increased profit, the trader raises wages, so that cost of production amounts to 1157.; then with an outlay of 1157. he makes a Profit of 57. in one day, or at the Rate of 1,825 per cent. per annum.

Hence while Price remains the same Wages may be considerably, and Rate of Profit be immensely, increased by the simple acceleration of the periods of return.

There may, therefore, be a solidarity of interest between Capitalist and Workman; and not a necessary antagonism, according to the doctrine we have alluded to. In fact, it is entirely founded on an arithmetical mistake. The writers who support it have entirely failed to perceive that Time is a necessary element in the definition of Rate of Profit: they define the Rate of Profit to be merely the ratio of the Profit to the Capital; and they never perceived that a Profit made in a day is a very different Rate of Profit than the same Profit made in a year: and thus whole masses of their doctrine come tumbling down by the simple rectification of an Arithmetical definition, just as if a barrel of dynamite were placed under the Monument.

Thus is verified the truth of the trade axiom, Small profits and quick returns.

3. Persons who engage in trade must live by their trade; they must, therefore, necessarily charge their customers such prices as will enable them in the long run to live on the profits of their trade. Hence, when transactions are very trifling in number and very small in amount, they must charge very high prices in order to enable them to live. It is this circumstance that compels small shopkeepers in country districts to charge such high prices for their goods, to the great indignation of many well-meaning but unreflecting persons. It is not uncommon to hear such persons exclaim against the extortionate charges of country shopkeepers, quite forgetting that if the traders cannot make a living out of their business they must give it up altogether; and the people be totally deprived of the convenience.

It has sometimes happened that country gentlemen, having plenty of other means to back them, have established rival shops for the express purpose of beating down the prices of country shopkeepers. The consequence has been that the traders who had nothing but their business to support them have been ruined; the gentlemen in process of time either got

An Expression of Senior's inadequate.

107

tired of their whim, or for other reasons abandoned it; and the germ of a nascent trade in a district was destroyed: a pregnant example of the Spanish proverb, Hell is paved with good intentions.'

It is also the extremely minute amount of the transactions of apothecaries and druggists which obliges them to charge such enormous profits, and not only the reward due to their superior skill. The druggist probably sells for a shilling what cost him a farthing. This apparently enormous profit is simply the necessary consequence of the exceedingly minute sums in which he deals. When a trader deals in large sums he can live upon a profit of 5 per cent. per day. But when the sums he deals in are shillings and pençe, the profit must be enormous to enable him to live. People do not require medicine by pounds' worth, but by shillings' worth and pennyworths, and hence his enormous profit is necessary to enable the trade to exist.

But a multiplication of transactions and an increase of their amount inevitably lowers prices. Nowhere are rents so high as in the City of London: and nowhere are the prices of ordinary goods so moderate. Goods in the City are in many cases 25 per cent. cheaper than in the suburbs; and this is not entirely the result of competition, which is equally active in one place as in the other; but it is the result of the greater number and magnitude of the transactions.

It is for the same reason that large Capitals always crush out small Capitals in a business; because large Capitalists can always live on smaller profits than small ones. If a trader had 1,000,000/, he could live very well upon a profit of 5 per cent. per annum, or 50,000l. a year: but if he had only a capital of 100%. he could not exist upon 57. a year.

4. Senior originated an expression which is often repeated, but which is very inadequate. He said that Profits are the reward of abstinence; meaning that they are the reward of Capital, or things which are saved from the past, and devoted to reproduction instead of personal enjoyment. But, after the

exposition of the system of Credit which we have given, it is evident that this expression is very inadequate, because the enormously greater proportion of trade is carried on by Credit, which is not the savings of the past, but the anticipation of the future. Hence Profits are not only the reward of abstinence, but to a very much greater amount the reward of foresight.

Interest and Discount.

5. The Profit made by the loan of Money is called Interest or Discount.

If the unit of Debt to be bought is 100l. and the Profit 5In the case of Interest the lender pays down 100%., and in exchange for it receives the Right to demand 1057. at the end of the year.

In the case of Discount the lender pays down 95%, and receives in exchange the Right to demand 100l. at the end of the year.

Of these two methods of trading in money Insurance and other Companies which make advances to landowners adopt the method of Interest; but Bankers and dealers in money invariably adopt that of Discount.

As by Discount a Profit of 57. is made on the actual advance of 95%, while by Interest a Profit of 5%. is made on the actual advance of 100l., it is evident that Discount is more profitable than Interest.

While the Rates are moderate the difference is not great : but as the Rates increase the difference increases at an enormous ratio; as a few examples will show.

Suppose a Money-lender discounts a Bill at 20 per cent. : he advances 8ol., and at the end of the year he receives 100l., and his Profit is 25 per cent.

If he discounts a Bill at 50 per cent., he advances 50%., and at the end of the year receives 100l.: therefore his Profit equals the advance, or is 100 per cent.

Suppose a man lent 100l. at 100 per cent. interest, at the end

of the year he would receive 200/.; and his Profit would be 100 per cent. if he discounted a bill at 100 per cent. he would advance nothing, and he would receive 100l. at the end of the year, or his Profits would be infinite!

6. The Rate of Interest in a country at any time depends upon the General Law of Supply and Demand: but there are several circumstances which influence it indirectly, and it is of great consequence to all sorts of commercial enterprise to have the average rate of interest as low as possible.

The Value of all Property which produces an annual revenue in the nature of fixed capital depends very greatly upon the average Rate of Interest: such as the Funds, Land, Shares in Commercial Companies, and Annuities of all sorts.

7. We cannot in this brief outline give any account of the long-continued prejudice against interest. Even in this commercial country it was only in 1833 that it became lawful to take more than 5 per cent. interest on commercial bills; and only in 1854 that the Usury Laws were finally abolished. In France interest is still limited to 6 per cent., except in the case of the Bank of France, which is allowed to raise its rate above that in order to be able to prevent a drain of gold from the country. And this in the country where Turgot demonstrated the futility of Usury laws before Bentham.

We may give a few examples to show the futility of usury laws. Boisguillebert says that the small provision dealers of Paris throve on money borrowed at the rate of five sous the crown per week, or more than 400 per cent. per annum, because they sold perhaps five crowns' worth of merchandise, on which they gained one-half, or 50 per cent. (i.e. 18,250 per cent. per annum); and if they perform this operation five or six times a week, it is easy to live and pay such interest to those who lent them the money.

So Gerard Malynes says that the similar trade of London was carried on with money borrowed at the rate of id. per