Elements of Political Economy by James Mill (1844)

Chapter 2. Distribution
Section III. Profits

When it is established, that the whole of the annual produce is distributed as rent, wages of labour, and profits of stock; and when we have ascertained what regulates the portion which goes to rent, and what the portion which goes to wages, the question is also determined with regard to profits of stock; for it is evident that the portion which remains is profits.

From preceding expositions, it appears, that rent is something altogether extraneous to what may be considered as the return to the productive operations of capital and labour. As soon as it is necessary to apply capital to land of an inferior quality, or upon the same land to apply a further dose of capital with inferior return, all that is yielded, more than this inferior return, is as if it did not exist, with respect to the capitalist and labourer. Whatever is yielded beyond this lowest return, either on particular spots of ground, or to particular portions of capital, might be annihilated, the moment it is produced, without affecting the portion which goes to either of those two classes. As soon as a new portion of capital is employed with inferior return, the case would be the same, if the productive powers of all the capital employed upon the land were reduced to this inferior return, and a quantity of produce, equal to the additional return, which used to be made, to the former portions of capital, were, by miracle, rained down from heaven upon the possessors of the land which yielded it.

The portion, which goes, in the shape of rent, to the landlord, and which is an excess beyond the return made to the whole of the capital and labour employed upon the land, is, in fact, the result of an accident. Suppose that all the land cultivated in the country were of one uniform quality, and yielded the same return to every portion of the capital employed upon it, with the exception of one acre. That acre, we shall suppose, yields six times as much as any other acre. What would be produced upon all the other acres, might justly be regarded as the return made to the labour and capital employed upon the land; and the whole of that return. The additional five-sixths, accruing from the singular acre, would not be considered as return made to labour and capital; it would be considered as the accidental product of a particular virtue in that particular spot. But what is true of this single acre is equally true of any number of acres, as soon as that event occurs which diminishes the return to any portion of capital, and induces all the owners of capital to limit their profits to the measure of that diminished return.

If there is any portion of capital, employed upon the land, which pays no rent, it is evident that the wages and profits, in that case, must regulate the wages and profits in other cases.

It thus fully appears, that nothing can be considered as the produce of the joint operations of capital and labour upon the land, beyond the return to that portion of capital which is applied without paying any rent, which return measures the quantity of the produce allowed to remain, after the rent is deducted, as the return to all the other portions of labour and capital employed upon the land. The whole of that therefore, which can be considered as the real product of labour and capital, remains to be shared between the labourer and capitalist, after the rent is withdrawn. It follows that, in considering what regulates wages and profits, rent may be left altogether out of the question. Rent is the effect, and not the cause, of the diminished produce which the capitalists and labourers have to divide between them.

When any thing is to be divided wholly between two parties, that which regulates the share of one, regulates also, it is very evident, the share of the other; for whatever is withheld from the one, the other receives; whatever, therefore, increases the share of the one diminishes that of the other, and vice versa. We might, therefore, with equal propriety, it should seem, affirm that wages determine profits, or that profits determine wages; and, in framing our language, assume whichever we pleased, as the regulator or standard.

As we have seen, however, that the regulation of the shares between the capitalist and labourer depends upon the relative abundance of population and capital, and that population, as compared with capital, has a tendency to superabound, the active principle of change is on the side of population, and constitutes a reason for considering population, and consequently wages, as the regulator.

As, therefore, the profits of stock depend upon the share, which is received by its owners, of the joint produce of labour and stock; profits of stock depend upon wages; rise as wages fall, and fall as wages rise.

In speaking of the produce which is shared between the capitalist and labourer, it is proper to explain, that I always mean such net produce as remains after replacing the capital which has been consumed. As, in stating the constituents of price, we say that a commodity must fetch in the market a value equal to three things: 1st, to the capital which has been consumed in its production; 2dly, to the ordinary profits of stock upon the capital employed; and, 3dly, to the wages of the labour; so in speaking of the portions into which, as the produce to be shared, the commodity or commodity's worth is to be considered as dividing itself, we must set apart the portion, always a determinate amount, which is for the capital consumed, and which is distinct both from profits and from wages. Thus, if in the production of a commodity, which sells for 100 l. capital to the amount of 50 l. has been consumed, 50 l. is that which is to be divided between the capitalist and labourer, as profits to the one, and wages to the other.

The terms alteration of wages, alteration of profits, are susceptible of various meanings, to which it is necessary to advert.

1. If, by alteration, is meant, a change in the proportions, it is evident that an alteration of one share implies an alteration of the other; and the proposition that profits depend upon wages, admits of no qualification.

2. If a change in the quantity of commodities is meant, it will not be true, in that sense, that profits so depend upon wages, as to fall when wages rise, and rise when wages fall; for both may fall, and both may rise, together. And this is a proposition which no political economist has called in question. If the powers of production are either increased or diminished, there will, in the one case, be more, in the other less, to divide. The proportions remaining the same, both wages and profits will, in the one case, be raised, in the other, depressed.

The terms may have another meaning still. When a change in wages and profits is spoken of, it may be the value of what is received under these denominations, which is meant to be indicated.

To perceive what may, and what may not, be truly predicated or spoken of the terms in this sense, it is necessary to advert to a double meaning of the word value.

1. It is used in the sense of value in exchange; as when we say, that the value of a hat is double that of a handkerchief, if one hat will exchange for two handkerchiefs.

2. Mr. Ricardo, in his exposition of the principles of political economy, used the word value in a sense referable, not to purchasing power, but to cost of production. Thus, if two days' labour went to the production of one commodity, and two to the production of another commodity, Mr. Ricardo would say, the two commodities were of equal value. In like manner, if two days' labour produced at one time a certain amount of commodities, and at another time, by an improvement in the productive powers of that labour, a greater amount of commodities, Mr. Ricardo would say that the value of the smaller quantity, and the value of the greater quantity, were the same.

If we use the term value in the sense of exchangeable value, or purchasing power; that is, command over a greater or less quantity of commodities; the case is the same with that which we have already considered, wherein rise and fall of wages or profits were taken to mean, a greater or less amount of commodities. When we say that the labourer receives a greater quantity of commodities, and when we say that he receives a greater exchangeable value, we denote by the two expressions, one and the same thing. In this sense, therefore, nobody has ever maintained that profits necessarily rise when wages fall, and fall when wages rise: because it was always easy to see, that, by an alteration in productive power, both may rise or fall together, and also that one may rise or fall, and the other remain stationary.

We come next to consider what language may be correctly used, in the sense which Mr. Ricardo annexed to the word value.

It will immediately be seen that, in this sense, the case corresponds exactly. with the first of those which I have already considered, that of proportions. If what is 'produced, by an invariable quantity of labour, continues to be divided in the same proportion, say one half to the capitalist, and one half to the labourers, that half may be a greater or a smaller quantity of commodities, but it will always be the produce of the same quantity of labour; and, in Mr. Ricardo's sense, always, for that reason, of the same value. In this sense of the word value, therefore, it is strictly and undeniably true, that profits depend upon wages so as to rise when wages fall, and fall when wages rise.

In the common mode of expressing profits, the reference that is made is not to the produced commodity, but to the capital employed in producing it; including the wages, which it is necessary to advance, and from which the owner expects of course to derive the same advantage as from his other advances. Profits are expressed not in aliquot parts of the produce, but of this capital. It is not so much per cent of the produce that a capitalist is said to receive, but so much per cent upon his capital. Now, the capital may be either of more, or of less value than the produce, according to the proportion in which it is capital of the fixed, or the circulating kind. Suppose a capital of 200 l. of which 50 l. is consumed in the production of a commodity, which sells for 120 l.; we have first to deduct 50 l. for the capital consumed; there then remains 70 l. to be divided between the capitalist and the labourers; and if we suppose that 50 l. has been paid for wages, in other words, that such is the share of the labourers, the capitalist receives 10 per cent upon his capital; including here, in the term capital, what he has advanced as wages; but he receives 28-1/2 per cent of the produce, or of that which is divided after replacing the capital consumed. It is only, however, the language which here is different; the thing expressed is precisely the same; and whether the capitalist says he receives 10 per cent upon his capital, or 28-1/2 per cent of the produce, he means in both cases the same amount, viz. 20 l.

There are, therefore, in reality, but two cases. The one, that in which we speak of proportions; the other, that in which we speak of quantity of commodities. In the one case, it is correct to say that profits depend literally and strictly upon wages. In the other case, although it is still correct to say that profits depend upon wages; for the greater the share that goes to the labourer, the less the share that remains for the capitalist; yet to make the language of quantity correspond in meaning with the language of proportions, the form of expression requires to be modified.

There is a great convenience in adapting our language to the rate upon the capital, rather than the shares of the produce; because the rate upon the capital is the same in all the varieties of produce, but the share of the capitalist is different, according to all the different degrees in which capital contributes to the intended result.

This, however it is evident, makes no difference in the truth of the doctrine. If in one case capital contributes twice as much, in another three times as much, as it does in a third case, whatever share the capitalist in the third case receives, the capitalist in the first case will receive twice as great a share, and the capitalist in the second case will receive three times as great; if the share of the capitalist in the third case is reduced one third by rise of wages, the share of each of the other two will also be reduced one third; and whatever, in percentage on his capital, the profits of the one are reduced, the same in that percentage will the profits of the others he reduced.

As this percentage however is generally spoken in the sense of exchangeable value, it may happen, as we have seen above, that the shares may be altered without an alteration of this percentage. If, at the same time that the shares of the capitalists are reduced, by a rise of wages, there should happen an increase of the productive powers of labour and capital, the reduced shares might consist of as great a quantity of commodities as the previous shares, and of course the exchangeable value, and percentage on the capital, expressed in the language of exchangeable value, would remain the same.

If it should be deemed a better mode of expounding the subject, not to regard, as a separate portion, what is required to replace the capital consumed, but to consider it as forming part of the share of the capitalist; the same propositions will still be true. The whole which is to be divided will, in this case, be different from the former whole, and the shares will not be the same proportion of that whole; but it will still be true that by how much the proportion of the labourers is increased, by so much that of the capitalist will be reduced; and that when the capitalist has set apart that portion of his share which is required to replace his capital, his profits, or the advantage upon the use of his capital, will be affected, precisely as they are said to be according to the former mode of exposition.

If we speak of what accrues to the two parties in the language of quantity, not of proportion, it is equally clear, in this mode of exposition as in the former, that the quantity of commodities is not necessarily altered when the shares are altered; that the shares may alter when there is no alteration in the quantity of produce to be shared; and, on the other hand, that the quantity of produce to be shared may alter, either up or down, while the shares are the same. It is, at the same time, true, that there can be no alteration in the quantity of produce which the one receives, but by an alteration in the quantity which the other receives; unless in that one case, in which the productive powers of the instruments of production have undergone alteration. The following, therefore, is a connected chain of true propositions.

1. That which accrues to the parties concerned in the production of a commodity or commodities, the labourers, and capitalist, as the return for their cooperation, is a share of the produce to each.

2. The share of the one cannot be increased, with out a corresponding diminution of the share of the other.

3. These shares remaining the same, the quantity of produce included in them may be either greater or less, according as the productive operations have been followed with a greater or a smaller produce.

4. According as you apply the term value, to the effect, the quantity of produce; or to the cause, the quantity of labour employed; it will be true, or it will not be true, that the value of what is received by the capitalist the labourer and reciprocates along with their shares.

It is equally easy, in this mode of expression as in the former, to translate the language of shares into that of percentage. The amount of the produce, or its exchangeable value, may be greater, or may be less, than the amount of capital employed. If the capital is all circulating capital, and consumed in the process of production, and if, as in ordinary language, we suppose wages to be included, the produce is greater than the capital, by the amount of the profits. Let us suppose that the capital is 500 l., and profits 10 per cent; the value of the produce is 550 l.; let us suppose that of this the capitalist pays 275 l. in wages; in other words, that the labourers' share is 50 per cent; it follows, that the share of the capitalist is 50 per cent also; but 50 per cent of 550 l. is a greater amount than 50 per cent of his capital, which is only 500 l. This is equal to 55 per cent upon his capital. And when he has deducted from his share, what is necessary to replace the portion of his capital, otherwise consumed than in the payment of wages, viz. 500 l. - 275 l. = 225 l., he has 50 l. remaining, or 10 per cent upon his capital.

Let us next take the case in which the capital 500 l., as before, is all fixed capital, none of it, excepting what is advanced as wages, consumed; that this is small, viz. 25 l.; and that the value of the commodity is 75 l.; of this, 25 l., or 1/3 is the share of the labourer; 50 l., or 2/3, is the share of the capitalist; but this, though 66-1/2 per cent upon the product, is but 10 per cent upon the capital.

There is a mode of viewing the gross return to the capitalist, which has a tendency to simplify our language, and, so far, has a great advantage to recommend it. The case of fixed and of circulating capital may be treated as the same, by merely considering the fixed capital as a product, which is regularly consumed and replaced, by every course of productive operations. The capital, not consumed, may be always taken, as an additional commodity, the result of the productive process.

According to this supposition, the share of the capitalist is always equal to the whole or his capital, together with its profits.

We may consider capital in two senses; first, as including; next, as excluding, wages.

In the first case, let us suppose a capital, of 500 l., of which 100 l. is paid in wages, to produce a commodity worth 550 l. The share of the capitalist is 450 l. or somewhat more than four-fifths, while that of the labourers is so much less than one-fifth and the profit of stock, after replacing capital, is 10 per cent.

Let us suppose, in the second case, a capital or 400 l., but exclusive of wages. This capital is employed, and the necessary labourers maintain themselves without wages, and take, as their remuneration, their share of the commodity when produced. The commodity is worth 550 l.; and of that 100 l. falls to the share of the labourers. The rate of profits is the same as before, and the proportions are the same as before, only with this correction, that in the former case the labourers sustained a discount or 10 per cent upon their share on account of anticipated payment The real shares in both cases are four-fifths to the capitalist, and one-fifth to the workmen.

It is sufficiently evident that, so long as the capital and the labour remain the same, and the shares remain the same, so long, in Mr. Ricardo's sense of the word value, will the same value accrue to each, whether the quantity of produce they receive be greater or less.

That the capital, and the labour, should remain the same, is as necessary a condition, as that the shares should remain the same; for if either is increased or diminished, the value of the product, in Mr. Ricardo's sense of the word value, is also increased or diminished.

The quantity of produce being supposed the same, we may illustrate the subject by the following cases.

1. Let us suppose that both capital and labour are diminished, and in equal proportions. This is precisely the same with the case in which the productive powers of labour and capital are increased; as it comes to the same thing, whether you have the same produce from a less cost of production, or a greater produce from the same cost of production. This case, therefore, has been already considered.

2. Let us suppose, that the capital is diminished, the labour not. This also is a case of diminished cost of production. If, for the produce of 550 yards of cloth, which was at first effected by a capital of 400 yards and a portion of labour which was paid by a fifth of the produce, only a capital of 200 yards should be required, but the same quantity of immediate labour; that the labourers may have the same share as before, it is necessary that they should have a greater aliquot part. Suppose, before that increase of productive power which is supposed in this case, when a capital of 400 yards was required for a produce of 550, and when the wages of the quantity of labour applied was 110 yards, that another commodity had been produced by the same quantity or labour, but by a capital of 200 yards. The value of this commodity would have been 330 yards, equal to the capital with its profits and the wages. Of this the labourers would have received 110 yards, or one-third. This is the same proportion to a capital of 200 yards, as one-fifth is to a capital of 400 yards. If the labour contributed one-fifth to the product of 550 yards, when aided by a capital of 400 yards, it contributes one-third, in the newly supposed case, when aided by a capital of 200 yards. One-third of 550 is 183 1/3; leaving to the capitalist 366-2/3, or a profit upon his capital of 83-1/3 per cent. According to the explanation, which we have already given and repeated, there is here an additional produce to each, by reason of the increase of productive power; and, also, which is only the same thing in other words, an augmented value in exchange. But in Mr. Ricardo's sense of the word value, there is only the same value to each, so long as the proportions remain unchanged.

The cases which I have thus put for illustration, are cases in which the productive powers of labour and capital are augmented; but as the same reasonings apply, mutatis mutandis, to the cases in which the productive powers are diminished, it is deemed unnecessary to lengthen this analysis by adducing them.

It may here be useful to the learner to look back, and ascertain the number and importance of the steps which he has advanced. He has discovered, what are the laws, according to which those commodities, which form the riches of nations, are produced; and what are the laws, according to which, when produced, they are distributed.

He has seen that there are two instruments of production; one primary, the other secondary: that labour is the primary instrument of production, and that, abstracted from those aids which it derives from capital, its productive powers are augmented chiefly by limiting the number of each man's productive operations; in other words, by what has been called the division of labour: that capital is secondary to labour, not only because it is subsequent in order of time, but because it owes its existence to labour; because the first capital is the result of pure labour, and because that which is subsequently the result of labour and capital combined, may thence be resolved into labour, the ultimate principle of all production.

The learner has now also seen, that, what is produced, by the operations of labour and capital, divides itself, in the first instance, into three portions; the rent of land; the wages of labour; and the profits of stock. Till the laws were discovered, which determine the boundaries of these several portions, that which goes as rent, that which goes as profits, and that which goes as wages, almost all the conclusions of Political Economy were vague and uncertain. It has been seen, that rent is something which may be considered independent of the general result or the productive powers of labour and capital; that it is the result of a peculiar defect of the earth, which does not continue to yield its produce in equal abundance to successive portions of capital; and that it is the excess of what is yielded to the more productive portions, above what is equal to the produce of the least productive portion of capital employed upon the land. After the limits were thus fixed of this one of the three portions, into which the produce of industry divides itself, whence it appeared that what may be regarded as the genuine effect of labour and capital in co-operation is left to be divided between the labourer and the capitalist; it was easy for the learner to see, that, in respect to proportions, as what fell to the share of the one was increased, what went to the share of the other was diminished, and that in this sense, wages and profits depend on one another; that in respect, however, to the quantity of produce which these shares may contain, the productive power of the instruments of production is the determining cause.

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