town the people who have great stocks to employ, frequently cannot get the number of workmen they want, and therefore bid against one another, in order to get as many as they can, which raises the wages of labour, and lowers the profits of stock. In the remote parts of the country there is frequently not stock sufficient to employ all the people, who therefore bid against one another in order to get employment, which lowers the wages of labour, and raises the profits of stock."

This account of Smith's is so perfectly true, and so obvious to any one who has practical knowledge of the subject, that it seems impossible that any one could contest it. Yet it has been vehemently denied by McCulloch, following Ricardo, and Mill. But as we have shewn that neither of these writers can even give a correct definition of the term Rate of Profit, it will be found that their criticisms are not worth very much.

We have seen above that Ricardo asserts that "Profits depend on the quantity of labour requisite to provide necessaries for the labourers, on that land or with that capital which yields no rent." McCulloch, who adopts everything in Ricardo without the slightest critical discernment, affirms that" profits are reduced in an advanced stage of society because the quantity of produce is diminished, and because the labourers get a larger share of this diminished quantity.

"The theory of Dr. Smith, as to the circumstances which determine the rate of profit, differs widely from the above. He seems to have had no idea of the fundamental principle of the decreasing productiveness of the capitals successively applied to the soil; and, not imagining that there was any natural cause why the produce obtained by the outlay of equal amounts of capital and labour should ever be diminished, he supposed that profits were lowered through the competition of capitalists; that when capital increased, the undertakers of different businesses became anxious to encroach on each other; and that in order to attain their object, they offered their produce at a lower price, and gave higher wages to their workmen.

"But though at first view this theory appears sufficiently plausible, it will not bear the least examination. It is easy to see that competition cannot occasion a general fall of profits. All that competition can do, and all that it ever does, is to reduce the Note 7 to Wealth of Nations.

profits obtained in different businesses and employments to the same common level, to prevent particular individuals realising greater or lesser profits than their neighbours. Farther than this competition cannot go.

"Hence it appears, that that fall in the rate of profit that is invariably observed to take place as society advances, is not owing to an increase of capital, or to the competition consequent upon that increase, but to an inability to employ capital (1) from a decrease in the fertility of the soils to which recourse must be had, or (2) from a rise of wages, or (3) from an increase of taxation."

17. So Mill, who is an equal idolator of Ricardo, follows in the same strain "The tendency of profits to fall as society advances, which has been brought to notice in the preceding chapter, was early recognised by writers on industry and commerce; but the laws which govern profits not being then understood, the phenomenon was ascribed to a wrong cause. Adam Smith considered profits to be determined by what he called the competition of capital; and concluded that when capital increased this competition must likewise increase, and profits must fall." After quoting from Smith as above, Mill continues—“This passage would lead us to infer that in Adam Smith's opinion the manner in which the competition of capital lowers profits is by lowering price; that being usually the mode in which an increased investment of capital in any particular trade lowers the profits of that trade. But if this was his meaning, he overlooked the circumstance that the fall of price, which if confined to one commodity really does lower the profits of the producer, ceases to have that effect as soon as it extends to all commodities; because when all things have fallen, nothing has really fallen except nominally; and even computed in money the expenses of every producer have diminished as much as his returns. Unless, indeed, labour be the one commodity which has not fallen in money price, when all other things have: if so what has really taken place is a rise of wages; and it is that, and not a fall of prices, which has lowered the profits of capital. There is another thing which has escaped the notice of Adam Smith; that the supposed universal fall of prices through increased competition of capitals is a thing which cannot 1 Principles of Political Economy, B. IV., ch. 4.

take place. Prices are not determined by the competition of the sellers only, but also by that of the buyers; by demand as well as supply. The demand which affects money prices consists of all the money in the hands of the community destined to be laid out in commodities; and as long as the proportion of this to the commodities is not diminished there is no fall of general prices. Now, howsoever capital may increase and give rise to an increased production of commodities, a full share of the capital will be drawn to the business of producing or importing money, and the quantity of money will be augmented in an equal ratio with the quantity of commodities. For if this were not the case, and if money, therefore, were as the theory supposes perpetually acquiring increased purchasing power, those who produced or imported it would obtain constantly increasing profits; and this could not happen without attracting labour and capital to that occupation from other employments. If a general fall of prices, and an increased value of money were really to occur, it could only be as a consequence of increased cost of production, and from the gradual exhaustion of the mines.

"It is not tenable, therefore, in theory, that the increase of capital produces, or tends to produce, a general decline of money prices. Neither is it true that any general decline of prices as capital increased has manifested itself in fact. The only things observed to fall in price with the progress of society are those in which there have been improvements in production greater than have taken place in the production of the precious metals, as, for example, all spun and woven fabrics. Other things, again, instead of falling, have risen in price, because their cost of production, compared with that of gold and silver, has increased. Among these are all kinds of food, comparison being made with a much earlier period of history. The doctrine, therefore, that competition of capital lowers profits by lowering prices is incorrect in fact as well as unsound in principle.

"But it is not certain that Adam Smith really held that doctrine; for his language on the subject is wavering and unsteady. denoting the absence of a definite and well-digested opinion. Occasionally he seems to think that the mode in which the competition of capital lowers profits is by raising wages. And when speaking of the rate of profit in new colonies he seems on the very verge of grasping the complete theory of the subject, as the

colony increases the profits of stock gradually diminish. When the most fertile and best situated lands have been all occupied less profit can be made by the cultivation of what is inferior both in soil and situation.' Had Adam Smith meditated longer on the subject, and systematised his views of it by harmonising with each other the various glimpses which he caught of it from different points, he would have perceived that this last is the true cause of the fall of profits usually consequent upon increase of capital." Mill also says Chalmers's ideas are more decidedly infected with the often-refuted notion that the competition of capital lowers general prices."

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18. On this subject Smith is undoubtedly in the right and his assailants in the wrong. Any one who has the slightest knowledge of commerce would laugh at the notion that the competition of capital does not produce a fall of prices and profits. Any trader in the City of London would say that the competition is so strong that every one is obliged to sell at the lowest price and the smallest profit.

The whole of this extraordinary doctrine is based upon Ricardo's fundamental fallacy that profits depend on the worst land in cultivation, or, as McCulloch says, profits are only reduced by diminishing production, i. e., quantity of produce detained.

It is perfectly manifest that this is only the reappearance of the fundamental fallacy of Ricardo's Theory of Rent, which says that it is bringing inferior land into cultivation, and expending more labour on its production, which raises the price of corn, whereas, as Ricardo has himself elsewhere said, that it is precisely the reverse, as we have shewn, and that it is the increase of the price of corn which admits more value being employed in bringing inferior land into cultivation.

It is not because inferior land is brought into cultivation that profits are reduced: but manifestly precisely the reverse. It is only when general profits have been reduced that inferior lands are brought into cultivation; or because the price of corn has risen so much that it will afford usual profits to bring it into cultivation.

Suppose, for example, that usual profits were 20 per cent. and suppose that there was land which might be reclaimed and yield a profit of 5 per cent. on the average price of corn at any time.

Then, if in consequence of the increased demand for corn the price rose so high that the inferior land would yield a profit of 20 per cent., then it would be cultivated.

Or suppose that the increased competition of capital reduces general average profits to 5 per cent., then the inferior land would be cultivated because it would yield usual profits.

No one would invest their money to produce 5 per cent. so long as they could invest it so as to produce 20 per cent.; hence so long as capital produces higher profits no one would resort to land which would only yield 5 per cent. So if the usual rate of interest on money were 10 per cent. per annum, no one would borrow money at 10 per cent. to cultivate lands which would only yield a profit of 5 per cent.

But in the natural progress of society population and the demand for corn would raise its price, and so increase the profit of cultivating inferior land: and at the same time the increase of capital would reduce the usual rate of profit: so the profits to be made by cultivating inferior lands would increase, and general average profits would decrease, until they became equal: and then inferior lands would be cultivated because they would yield usual profits.

Hence the diminution of the general Rate of Profit greatly increases the value of all lands; and a general rise of Profits and Interest would throw much land out of cultivation, or prevent a great quantity of land from being brought into cultivation; and greatly lower the value of all lands, as we shall shew more fully in the next section.

Thus in this case, as in many others, Ricardo and his followers, have simply inverted cause and effect. If profit and interest are very high, inferior lands are not cultivated because it would not pay to do so when profits and interest are low, inferior lands are cultivated, because it pays to do so. And manifestly it is not the reclaiming inferior lands which give a diminishing production that reduces profit; but the reduction of average general profits which enables inferior lands, which only yield a diminished production, to be cultivated.

Even supposing that it were true that bringing inferior lands into cultivation gave a diminished produce and profit, it is perfectly manifest that persons who had capital to lend would not advance it at a lower rate of profit for the purpose of reclaiming