Principles of Political Economy

Contents

1. Prefaces 11 min 12

   Mill’s prefaces to all seven editions, 1848–71. The first sets out the design: a successor to the Wealth of Nations that, like Smith, joins economic principles to their applications in social philosophy, updated with the theory developed since. Later additions record the changes. The socialism chapter was enlarged in 1849, and in 1852 Mill insisted that his objections were not a condemnation of socialism as an ultimate goal, only of mankind’s present unpreparedness. Later additions covered French co-operative associations, currency (1857), interest (1865) and the cheap People’s Edition. In 1871 he deferred the new debates on wages and trade unions, and on the Irish Land Act.

2. Preliminary Remarks 59 min 11

   Mill defines the subject, wealth, against the mercantile confusion of wealth with money: money is only an instrument of exchange, like a highway. Wealth is everything useful that has exchange value. Debts, public funds and slaves are wealth to individuals but not to nations. He then surveys how wealth has been produced and shared from hunting tribes through pastoral and agricultural societies, Asian monarchies, the ancient city-states, Rome and feudal Europe to modern commercial nations. He concludes that the laws of production depend on physical facts, while those of distribution are partly of human institution, though their working can still be studied scientifically.

3. I.1 Of the Requisites of Production 17 min 5

   Production has two requisites, labour and appropriate natural objects. Nature supplies powers as well as materials; all labour does is move things into positions where natural forces act. It is therefore meaningless to ask whether nature or labour contributes more, as the Physiocrats and Smith did about agriculture; land bears rent only because it is limited in quantity. Natural agents are either practically unlimited, and so have no value, or limited, like land, mines, water-power and fisheries, in which case their use commands a price.

4. I.2 Of Labour as an Agent of Production 40 min 4

   Mill traces the indirect labour behind a product: the food that maintains the workers in advance, whose provider is rewarded for “abstinence”, plus five further kinds. These are producing materials, making tools and implements, protecting industry (buildings, but also soldiers, police and judges), carrying and distributing goods, and labour on human beings, in rearing, training and keeping workers healthy. To these he adds the labour of inventors and of scientists, whose discoveries are among society’s most productive outlays. He rejects the usual agricultural, manufacturing and commercial classification as unscientific.

5. I.3 Of Unproductive Labour 27 min 6

   Mill takes up the disputed distinction between productive and unproductive labour. Labour produces utilities of three kinds: those embodied in objects, those embodied in human beings, and mere services. He decides to call productive only labour that creates material wealth, directly or ultimately, so training and government protection count but performers, soldiers and clergy do not. Unproductive is not a stigma, and productive labour too can be wasted. Consumption is likewise productive or unproductive. What deserves regret is not luxury itself but the unequal distribution of the surplus and the share taken by those who render no service.

6. I.4 Of Capital 24 min 3

   Capital is the accumulated stock of past produce set aside for production: to provide buildings, tools and materials and to maintain labourers. It is not money. Whether a thing is capital depends not on its kind but on its owner’s purpose. A spendthrift’s borrowing or a government’s war loan destroys capital even while the lender keeps a claim, which is then only a claim on other people’s income. Some capital is needed only because of particular arrangements, such as taxes on materials, rent paid in advance and wages above subsistence.

7. I.5 Fundamental Propositions respecting Capital 1 h 10 min 16

   Mill sets out four fundamental propositions about capital. Industry is limited by capital, though every increase of capital can employ more labour, so the limit of wealth is never a lack of consumers. Capital is the result of saving. What is saved is nevertheless consumed, by productive labourers, and reproduced, which explains how countries recover quickly from devastation. Finally, demand for commodities is not demand for labour: only the capital that advances wages employs workers. He applies these to war loans, Chalmers’s case for raising supplies within the year, the Poor Law and the incidence of the income tax.

8. I.6 On Circulating and Fixed Capital 26 min 7

   Circulating capital, including materials and wages, does its whole work in one use. Fixed capital, such as buildings, machinery and improvements of land, yields its return over time. Turning circulating into fixed capital can harm labourers, at least temporarily, because it reduces the fund for wages, and Mill rejects the argument that cheaper goods automatically compensate them. In practice, though, improvements come gradually out of new savings and in the long run enlarge both capital and output. Legislators should still slow sudden changes and relieve the workers they displace.

9. I.7 On what depends the degree of Productiveness of Productive Agents 35 min 8

   Mill asks why the same agents of production yield more in some places and times than others. Natural advantages (soil, climate, minerals, above all a maritime situation) matter less than the qualities of the people: regular energy of labour, skill and knowledge, the general diffusion of intelligence, and moral trustworthiness, which saves the cost of watching and enforcing. Using a Swiss manufacturer’s evidence, he argues that education raises both the efficiency and the conduct of workmen. Among secondary causes, security comes first, and protection against the government matters more than protection by it; laws favouring one class over another are condemned as violations of economic policy.

10. I.8 Of Co-operation, or the Combination of Labour 42 min 15

    Following Wakefield, Mill treats co-operation as the law underlying the division of labour: simple co-operation (many working together at one task) and complex co-operation (separation of employments linked by exchange). A thought experiment shows that a market of non-agricultural producers calls forth surplus food that would never otherwise have been grown, so productive agriculture needs a town population; he applies this to colonization and India. He then reviews Smith’s three advantages of the division of labour, doubting the time saved in changing tasks and defending varied work, adds Babbage’s principle of grading labour by skill, and notes that division is limited by the extent of the market.

11. I.9 Of Production on a Large, and Production on a Small Scale 59 min 16

    Combination of labour, costly machinery and the saving of supervision favour large establishments, and free competition tests which scale is cheaper, though underselling does not always mean greater social produce. Small producers, valuing independence, are gradually ruined. Joint-stock companies raise great capitals and give publicity, against the weaker zeal of hired managers, which percentage pay can partly cure. Where competition among a few firms is illusory, as with gas, water and railways, Mill would make the service a public function. In agriculture the advantage of large farms is doubtful: small cultivators, especially owners, extract a larger gross and possibly larger net produce, as Flemish and recent French evidence shows.

12. I.10 Of the Law of the Increase of Labour 17 min 8

    Opening the laws of the increase of production, Mill reduces its requisites to labour, capital and land and takes labour first. Following Malthus, he holds that every species, man included, can multiply in a geometrical ratio, and that population is held back either by deaths (want, war, disease) or, in more advanced societies, by fewer births through prudence, custom or law, as in Norway and Switzerland. Any improvement in the labourers’ condition is soon absorbed by greater numbers unless their habitual standard of comfort rises. Labour, then, sets no limit to production.

13. I.11 Of the Law of the Increase of Capital 35 min 12

    Capital is the product of saving, which depends on the size of the surplus above necessaries and on the strength of the effective desire of accumulation. Drawing heavily on John Rae, Mill argues that this desire varies with security, health, intelligence and concern for others, illustrating its weakness with Canadian Indian villages, the Jesuit missions of Paraguay and China, where accumulation stops while interest remains high: the stationary state. In England and Holland, by contrast, the desire is strong enough to keep accumulating at low profits, helped by early security, commercial ambition and Puritan habits. The limit to production must therefore lie in land.

14. I.12 Of the Law of the Increase of Production from Land 36 min 9

    Mill calls the law of diminishing return from land the most important proposition in political economy: beyond an early stage, more labour on land yields a less than proportional increase of produce, whether by resort to worse land or by higher cultivation of the old. He answers Carey’s claim that cultivation moves from poor to rich soils. Against the law stands the progress of civilization: agricultural improvements, transport, cheaper manufactures, better government, land tenure and education, all of which delay or compensate for it. Mining is subject to the law even more strictly, but also more open to improvement and new discoveries.

15. I.13 Consequences of the Foregoing Laws 25 min 5

    Production is limited either by a weak desire to accumulate, the case of Asian and backward European countries, which need security, education and foreign capital, or, in England, by diminishing returns from land. Hence the need to restrain population does not arise only from inequality: “the niggardliness of nature, not the injustice of society” punishes over-population, and even an equal communist society would grow poorer if numbers doubled. Whether conditions improve depends on whether improvement outpaces population. Importing food and emigration can relieve pressure for a time, as Ireland’s crisis showed, but cannot replace checks to population.

16. II.1 Of Property 46 min 11

    Mill opens Book II by separating the laws of production, which are fixed by nature, from the distribution of wealth, which is a matter of human institutions. He then weighs private property against socialism. He reviews Owen, Louis Blanc, Cabet, Saint-Simonism and Fourierism and answers the standard objections about incentives, population and the apportioning of work. If the choice lay between communism and property as it now exists, he says, communism’s difficulties would be “dust in the balance”. The real comparison, though, is with property reformed, and the deciding question is which system leaves most room for liberty. Socialist schemes deserve an experimental trial.

17. II.2 The same subject continued 48 min 15

    Mill defines private property as each person’s right to what they produce or receive by fair exchange, and defends payment for capital as the reward of past labour and abstinence. He accepts prescription for old wrongs but not for unjust institutions. He separates bequest, which belongs to property, from inheritance on intestacy, which does not, and proposes capping what any individual may receive by gift or inheritance. Land, not being made by labour, is justified only when its owner improves it. English landlords rarely do and Irish landlords never, so the state may take land over on payment of compensation.

18. II.3 Of the Classes among whom the Produce is distributed 9 min 4

    Mill lists the classes among whom private property divides the produce: landowners, capitalists and labourers. Their complete separation in agriculture, he notes, is almost peculiar to Britain and the Low Countries. Elsewhere one person often owns all three requisites, either as a peasant proprietor or as a slave-owner, or owns two, as in métayer and Irish or Indian tenures. In manufacturing the lifelong hired journeyman is a modern creation, unknown to the medieval guilds.

19. II.4 Of Competition and Custom 17 min 5

    Distribution under private property is governed by two agencies, competition and custom. Economists, Mill argues, exaggerate the first, because only competition makes their science exact. Historically custom ruled: it protected the weak against the strong, fixed the rents of Indian ryots, turned European serfs into customary tenants and set the métayer’s half-share. Even today retail prices, professional fees and trade rules such as those of the booksellers resist competition. Every later conclusion of the treatise must be read with this correction in mind.

20. II.5 Of Slavery 15 min 11

    Mill treats slavery as the form in which the landowner owns the labour itself. Where fresh slaves are cheaply imported, self-interest dictates working them to death. Ancient slavery, with easy manumission, was less hopeless than modern colonial slavery. Slave and serf labour is inefficient: it needs heavy supervision, keeps the slaves ignorant and allows little skill. Whether emancipation costs the owner depends on free wages; in the underpeopled West Indies it did. Mill ends by condemning British sympathy for the Confederacy and surveying the progress of abolition.

21. II.6 Of Peasant Proprietors 1 h 8 min 46

    Against English prejudice, Mill assembles testimony on peasant proprietors. Sismondi, Inglis and Laing describe Switzerland and Norway; Howitt, Rau, Kay and Reichensperger describe Germany; the treatise on Flemish Husbandry describes Belgium; Thornton describes the Channel Islands. Arthur Young describes France and coins the phrase “the magic of property”. The witnesses agree on the extraordinary industry, skill and comfort of small owners. Mill explains away the Flemish distress of 1846–47 as harvest failure. He accepts Young’s warning that properties may become too small, which turns the question into one of population.

22. II.7 Continuation of the same subject 38 min 34

    Mill draws conclusions from this evidence. Peasant property, or any secure tenure at a fixed rent, calls out intense industry and agricultural knowledge. It educates the mind and fosters thrift and self-control. Against Jones and McCulloch, he argues that it restrains population, because the owner can see what his land will support. The evidence of Switzerland, Norway, Germany and above all France, whose population grows slowest in Europe, bears this out. Excessive subdivision reflects backward capital, not property itself. Compared with English wage-labour farming, peasant property is eminently good for the labouring class.

23. II.8 Of Metayers 40 min 33

    Mill turns to tenures in which the produce is shared between labourer and landowner alone, beginning with metayage, where custom fixes the landlord’s share, usually half. Such a system gives the cultivator weaker motives than a peasant owner but stronger ones than a day-labourer, though, as Smith noted, it discourages investment by the tenant. Against the scorn of Arthur Young and other English writers, whose evidence came from pre-revolutionary France crushed by taxes, Mill sets the testimony of Châteauvieux and especially Sismondi on prosperous Tuscan metayers. He concludes that small holdings with secure tenure work well and warns against replacing them with capitalist farms.

24. II.9 Of Cottiers 27 min 15

    Cottier tenure is any arrangement in which labourers rent land directly from its owner at rents fixed by competition. Ireland is the chief example. Because the competitors bid for bare subsistence, rents are pushed to the most a tenant can promise, leaving him no gain from industry or prudence and no loss from recklessness. Mill rejects explanations of Irish poverty by racial character, pointing to these institutions, and to agrarian secret societies as their defence. He then compares India, where the British turned zemindar tax-collectors into landlords in Bengal, with disappointing results, and elsewhere settled with cultivators or villages directly.

25. II.10 Means of abolishing Cottier Tenancy 30 min 10

    Written during the Famine and revised in 1856 and the 1860s, this chapter asks how to abolish cottier tenancy. Mill condemns the relief policy that fed the people without changing their tenure, and declares that the land of every country belongs to its people, landlords being owed only compensation. He favours making cottiers peasant proprietors at fixed rents, through reclamation of waste land and purchase schemes, rather than turning them into hired labourers. The later sections record the effects of emigration, the Encumbered Estates Act and the shift to grazing, and print Cairnes’s evidence on the high prices paid for Ulster tenant-right.

26. II.11 Of Wages 45 min 21

    Mill states the wages-fund doctrine: under competition, general wages depend on the ratio between the capital devoted to hiring labour and the number of labourers, and on nothing else. He explains away apparent exceptions such as good trade, high prices and dear food, and qualifies Ricardo’s minimum wage as a habitual standard that can rise or fall permanently. Outside new colonies, population growth must lower wages until checked by death or prudence. He surveys legal and customary restraints on marriage in Europe, deplores the lack of any such check among English farm labourers, and defends the population principle against its sentimental critics.

27. II.12 Of Popular Remedies for Low Wages 32 min 11

    Mill examines the popular remedies for low wages. A legal or moral minimum wage, if above the competitive rate, must leave some unemployed unless the state provides work; and a guarantee of work to all, without control over births, would eventually absorb the whole national income. He endorses the 1834 Poor Law, which secured relief while making it unattractive, condemns the old allowance system for driving wages down and pauperising the whole class, and argues that allotments, though better, would have the same effect on wages if made general.

28. II.13 The Remedies for Low Wages further considered 32 min 10

    Mill’s own remedies for low wages. Poverty is not inevitable, since the instinct of population can be governed if opinion condemns large families as it condemns drunkenness; he hints at family limitation within marriage and expects women, once equal citizens, to be its strongest allies. Trade unions already show that workers understand the link between numbers and wages. To make prudence general requires national education together with a measure that lifts a whole generation out of poverty: state-assisted colonization and small freeholds carved from common land. A later paragraph notes that spontaneous emigration and free trade have since opened a breathing-space.

29. II.14 Of the Differences of Wages in different Employments 52 min 12

    Mill reviews Adam Smith’s account of why wages differ between employments and corrects it. Compensating differences for hardship or uncertainty exist only where workers can choose; where labour is plentiful, the most repulsive work is paid worst. Skilled wages carry a monopoly premium because education and social rank bar most workers, making the grades almost hereditary castes. He discusses charity-educated clergy and amateur authors, the low pay of subsidiary and family labour, the crowding of women into few occupations, trade combinations as defences against over-population, and pay fixed by custom rather than competition.

30. II.15 Of Profits 46 min 9

    Profit is analysed into interest (the reward of abstinence), insurance against risk, and wages of superintendence. Its minimum varies with the desire to accumulate and the security of property. Profits in different trades tend not to equality but to equal expectations, the balance being restored mainly by shifts in borrowed capital. Mill then argues that profit arises because labour produces more than its own support, not from exchange, and that the rate of profit depends only on the cost of labour, itself a function of the labourer’s real wages, the efficiency of labour and the cost of the goods he consumes.

31. II.16 Of Rent 36 min 7

    Rent is the price of a natural monopoly over land. Since the worst land in use, or the last dose of capital applied to land, yields only ordinary profit, rent on all other land equals its surplus over that margin: the theory of Anderson, West, Malthus and Ricardo. Mill answers objections, treats returns on capital sunk permanently in land as rent, and rebuts Carey’s claim that all rent is interest on improvements, noting that better transport lowers rents. He concludes that rent forms no part of the capitalist’s real cost of production.

32. III.1 Of Value 19 min 6

    Opening Book III, on Exchange, Mill explains why value comes after production and distribution: exchange is only part of the machinery of distribution, not a law of nature, and he declares the theory of value complete. He separates value in use from value in exchange, defines price as value in money and value as general purchasing power, and insists that while all prices can rise together, a general rise of values is a contradiction. His laws apply to wholesale markets governed by competition, and only loosely to retail prices.

33. III.2 Of Demand and Supply in their relation to Value 25 min 8

    Exchange value requires both utility and difficulty of attainment; De Quincey’s musical box shows utility as the upper limit of price. Commodities fall into three classes: absolutely limited in supply, reproducible at constant cost, and reproducible only at rising cost. For the first, value is set where quantity demanded equals quantity supplied, an equation rather than a ratio. Monopoly value is a case of this law, as are temporary scarcities, durable goods in excess supply and, Mill holds, the value of labour.

34. III.3 Of Cost of Production, in its Relation to Value 15 min 3

    For goods that can be made by labour and capital, cost of production with the ordinary profit is a minimum below which supply will not continue and, under free competition, also a maximum. Market value oscillates around this natural value, as the sea around its level. Supply need not actually change for value to follow cost, since the threat of competition suffices. Demand and supply therefore govern only temporary fluctuations; their stable equilibrium is at cost of production.

35. III.4 Ultimate Analysis of Cost of Production 34 min 9

    Cost of production resolves mainly into labour, as Ricardo’s stockings example shows, but since value is relative, general changes in wages or profits do not alter values; only differences between employments do. Higher wages cannot raise prices generally, only lower profits. Profits enter more largely into goods that require capital to be held longer or embody durable machinery, so such goods do not exchange in proportion to their labour, and a fall of profits lowers their relative value. Taxes and scarce materials or natural agents also enter cost.

36. III.5 Of Rent, in its Relation to Value 25 min 6

    Agricultural produce belongs to the third class of commodities, produced at several costs at once. Its value is set by the cost of the portion produced under the least favourable conditions, so rent is a surplus over that cost and forms no part of the price. Rent therefore is no burden on the consumer. The same reasoning applies to mines, fisheries and building land, and to any differential advantage, such as a patent or superior business talent, which yields gains governed by the law of rent.

37. III.6 Summary of the Theory of Value 13 min 5

    Mill sums up the theory of value in seventeen propositions. Value is relative, so there can be no general rise of values. Market value follows demand and supply; natural value is a scarcity value for goods in fixed supply and otherwise cost of production, meaning wages and profits at the costliest portion of supply needed. Rent is not part of cost, and quantity of labour is the chief element. He then adds two exceptions. Peasants who sell a surplus are not bound by cost of production, so their prices depend on demand and supply alone. Slave-grown goods sell below their labour cost when slavery is confined to some branches.

38. III.7 Of Money 17 min 7

    Mill introduces money. Without it there would be no common measure of value and barter would block the division of labour. Gold and silver won out because they are durable, divisible, portable, uniform and stable in value, and governments took over coinage, often to debase it. The habit of treating money as wealth is an illusion: incomes are really shares of produce, and money is a machine for saving time and labour that has an independent influence only “when it gets out of order.” Money is a commodity whose value follows demand and supply and, in the long run, cost of production.

39. III.8 Of the Value of Money, as dependent on Demand and Supply 27 min 8

    The value of money is its purchasing power, varying inversely with general prices; business usage that calls the rate of interest the “value of money” confuses money with capital. Money’s supply is the money people are laying out, and its demand is all the goods offered for sale. In a purely metallic system without credit, prices vary exactly with the quantity of money multiplied by its rapidity of circulation. Mill warns against careless use of this doctrine: hoarded money and reserves do not act on prices, imported gold may go into securities and leave again, and seasonal increases of currency only prevent a fall.

40. III.9 Of the Value of Money, as Dependent on Cost of Production 18 min 6

    In the long run the value of money is governed by the cost of producing gold and silver at the least productive mine worked. Governments’ attempts to hold money in the country by banning its export failed. Under free coinage coin equals bullion in value; a seignorage raises coin above bullion only by keeping it scarcer. Because the stock of precious metals is so large and durable, changes in cost act slowly, through quantity. Mill therefore keeps the quantity theory: cost determines the value of money only by changing its quantity, so the quantity theory and the cost theory are compatible.

41. III.10 Of a Double Standard, and Subsidiary Coins 8 min 3

    Gold and silver both suit the purpose of money, and some nations have made both legal tender at a fixed ratio. Because their relative values change, debtors always pay in whichever metal is overvalued, the other is melted, and the standard shifts between them with a tendency to depreciation. Mill suspects that much of the support for a double standard comes from that tendency. He prefers a single standard, with the other metal coined at market value or, as in England, silver used as a token coinage at a slight overvaluation, legal tender only up to forty shillings.

42. III.11 Of Credit, as a Substitute for Money 30 min 10

    Credit is permission to use another’s capital: it transfers capital without creating it, but moves it to those who can employ it best, and deposit banking puts idle balances to work. Credit given to unproductive consumers diverts capital from production. Credit also acts as purchasing power and replaces money through book accounts, bills of exchange (quoting Henry Thornton on real and accommodation bills), bank notes and cheques. The London Clearing House settles millions in cheques daily with small balances, so Britain conducts its business with surprisingly little gold.

43. III.12 Influence of Credit on Prices 52 min 11

    Mill argues that what acts on prices is credit in any form, not bank notes as such. Speculation on credit can raise many prices at once, and its collapse brings a commercial crisis, as in 1825; the crisis of 1847 came instead from a drain on loanable capital through foreign payments and railway calls. Notes are a more potent form of credit than bills, and bills than book credits, but Tooke’s evidence shows that speculation runs mostly on book credit, with notes increasing only when the tide turns. Cheque credit can do whatever notes do, so the 1844 Act’s restriction of notes is a superficial remedy.

44. III.13 Of an Inconvertible Paper Currency 37 min 8

    Governments learned to make paper of no intrinsic value circulate as money. Convertible paper merely replaces coin, but inconvertible paper can be issued without limit, and its value then depends entirely on the issuer, whose interest is to issue more. Such paper could be kept at par by contracting issues whenever gold rose above the Mint price, but convertibility is simpler and safer. Mill rejects schemes resting on paper “founded on property,” citing the assignats, and Attwood’s and Hume’s belief that rising prices stimulate industry. Depreciation only transfers wealth from creditors to debtors, and the resumption of 1819 wronged no one.

45. III.14 Of Excess of Supply 20 min 8

    Mill returns to the general glut debate against Malthus, Chalmers and Sismondi. A general excess of supply is impossible, since every seller brings an equal demand: goods pay for goods. Nor can desire fall short, since anyone who produces wants something in return, so any excess is a misdirection of production. Apparent gluts have two sources: commercial crises, when collapsing credit creates a temporary excess of goods over the money demand, and the long-term fall of profits, which is a different thing. Mill credits J. B. Say and his father, James Mill, with the correct doctrine.

46. III.15 Of a Measure of Value 12 min 6

    Mill argues that the long debate over a “measure of value” deserved less attention than it got. Value is a relation, so any commodity measures relative values at one time and place, but nothing can measure value against “things in general” across time, since no commodity keeps a constant purchasing power. What economists sought was really a measure of cost of production, an invariable commodity that cannot exist either. He rejects Smith’s candidates, corn and labour, suggests a day’s subsistence as a rough measure of use value, and separates a measure of value from its regulator, as a thermometer differs from the fire.

47. III.16 Of Some Peculiar Cases of Value 13 min 2

    Mill takes up cases where cost of production cannot fix relative values. When two goods come from one process, like coal-gas and coke, cost determines only their combined price; demand divides it, so that each is bought in the proportion produced. Crops competing for soils of different suitability are priced by cost on the land where both are grown, which demand determines. Crop rotation is another joint cost. In these cases demand acts as a permanent regulator of value, a principle he will apply to international trade.

48. III.17 On International Trade 23 min 13

    Why are goods imported that could be made at home? Because capital and labour do not move freely between countries, trade follows comparative rather than absolute cost, as Ricardo and James Mill showed with numerical examples. The gain lies in the imports, a more efficient use of the world’s productive forces, not in exports, which is a mercantilist relic kept alive by the selling class. Mill rejects Smith’s “vent for surplus” and adds indirect gains: wider markets, new wants that stir industry, and the moral and intellectual contact that, he believes, is making war obsolete.

49. III.18 Of International Values 1 h 5 min 14

    Since cost of production does not govern the value of imports, Mill turns to demand. Through his England–Germany cloth-and-linen example he shows that the terms of trade lie between the two home cost ratios and settle where each country’s exports exactly pay for its imports: the Equation of International Demand. Countries whose goods are in strong, expandable demand, and which want little from abroad, gain most. Later sections, added after Thornton’s criticism, try to remove the remaining indeterminacy. He distinguishes getting imports cheaper in value from getting them cheaper in cost, which depends on the efficiency of labour.

50. III.19 Of Money, Considered as an Imported Commodity 13 min 3

    Money is an imported commodity in most countries, so its value follows the law of international values. Where bullion is bought as merchandise, money is cheapest, and prices highest, in countries whose exports are in great demand, compact, close to the mines, and whose own demand for imports is small. Senior’s explanation, efficient labour, accounts for cost but not value. Mill thinks English dearness is partly illusory and partly foolish custom. Any change in international demand alters a country’s value of money even if mining costs are unchanged.

51. III.20 Of the Foreign Exchanges 18 min 7

    International payments are mostly made by bills of exchange, which offset debts between countries so that gold moves only to settle balances. Mill explains par, premium and discount, first with a common currency, which he hopes all countries will one day share, then with francs and pounds. The premium cannot exceed the cost of shipping gold. Calling exchanges “favourable” or “unfavourable” is a mercantilist relic. Casual imbalances correct themselves through the premium on bills; permanent ones require a change of prices. Exchanges reflect a country’s balance with all others together.

52. III.21 Of the Distribution of the Precious Metals Through the Commercial World 21 min 7

    The use of money and bills does not alter the law of international values. When a country imports more than its exports pay for, gold flows out, its prices fall and foreign prices rise until exports and imports balance again. This is the same adjustment barter would require. Money is like oil to machinery. Mill reworks the effects of export improvements in money terms, credits Ricardo with the principle that metals distribute themselves as barter trade would require, and shows that tribute and other unrequited payments cost the paying country a further loss through worse terms of trade.

53. III.22 Influence of the Currency on the Exchanges and on Foreign Trade 22 min 7

    Mill considers temporary changes that start with money itself. A sudden addition to a country’s currency raises prices and spreads abroad through the exchanges until it is evenly diffused; replacing gold with convertible paper frees capital for production, a gain to issuers and to the world, and should go as far as safety allows. Inconvertible paper can be over-issued: it leaves trade unaffected but creates a nominal exchange measured by the premium on bullion. Speculative credit raises prices, turns the exchanges and drains gold, often the immediate trigger of a crisis.

54. III.23 Of the Rate of Interest 36 min 10

    Mill treats interest as the price of loanable capital, fixed by the demand of businesses, governments and spenders against a loan fund made up of bank deposits, notes, bankers’ credit and the fortunes of people who live on interest. Fluctuations come mainly from bankers’ short-term funds, from speculation and panic, from war loans and railway building, from gold discoveries and limited liability. The quantity of money affects prices, not interest, but changes in it can push interest either way: depreciation raises it, while new notes lent by banks lower it. The rate of interest also sets the price of securities and land.

55. III.24 Of the Regulation of a Convertible Paper Currency 1 h 8 min 18

    A critique of Peel’s Bank Charter Act of 1844. Mill sides largely with Tooke and Fullarton against the Currency School: convertible notes cannot be overissued in quiet times and do not cause speculation, though extra notes can prolong a speculative boom in its last stage, and here the Act helps. Its costs are greater. It stops the Bank from lending freely once a panic has come, so it must be suspended, as in 1847, and it doubles the effect of drains of gold for foreign payments that a reserve should simply meet. Mill closes on the profit of note issue and the safety of country bank notes.

56. III.25 Of the Competition of Different Countries in the Same Market 26 min 8

    When can one country undersell another? Only when it has a greater comparative advantage and its demand gives the customer better terms than the rival’s whole advantage; otherwise the rival merely trades on worse terms, at the cost of its consumers of imports. General low wages never cause underselling, since they raise profits rather than lower prices. Low wages confined to export trades do, as with slave-grown cotton and the domestic weaving of Zurich. Mill ends with colonies like the West Indies, which are outposts of the home economy, and carrying states such as Venice and Holland.

57. III.26 Of Distribution, as Affected by Exchange 19 min 6

    Looking back over the theory of value, Mill asks whether money and exchange alter the laws of distribution, and concludes that they do not. Real wages still depend on capital, population and the labourers’ standard of comfort; money wages on the cost of food at the margin of cultivation. Rent remains the surplus over the worst land in use, and profits are what is left, varying inversely with the Cost of Labour. A rise of general wages falls on profits, not prices, though the conflict of interest between capitalists and labourers is, Mill says, largely apparent.

58. IV.1 General Characteristics of a Progressive State of Wealth 13 min 4

    Book IV adds “dynamics” to the “statics” of the first three Books: the laws of a society progressing in wealth. Mill names the main features of that progress: a growing power over nature through science and invention, increasing security of person and property, and an improving capacity for co-operation, shown in joint-stock companies and workers’ co-operative societies. These permit indefinite growth of capital and production. He warns that population may grow as fast, so that national wealth can rise while the mass of labourers gain nothing but numbers.

59. IV.2 Influence of the Progress of Industry and Population on Values and Prices 27 min 6

    Progress lowers the cost of manufactured goods, through invention and wider trade, while the cost of food and raw materials tends to rise as population presses on land and mines, unless agricultural improvement keeps ahead, as Mill says it recently had in Britain and France. Manufactures therefore fall in value relative to farm produce. Progress also reduces fluctuations of price, through better transport and the work of speculative merchants, whom Mill defends: speculators gain as a body only when they moderate fluctuations. Crises of credit, however, have not grown milder.

60. IV.3 Influence of the Progress of Industry and Population, on Rents, Profits, and Wages 42 min 6

    Mill traces the separate effects of growing population, growing capital and improvements in production on rent, profits and wages. More people with the same capital lower wages and raise rent; more capital with the same people raises wages at the cost of profits; together they raise rent and lower profits. A sudden improvement in agriculture would lower rent, as Ricardo argued, but improvement is always gradual and population quickly takes up its gains. His conclusion: progress enriches the landlords, raises the cost of the labourer’s subsistence and lowers profits.

61. IV.4 Of the Tendency of Profits to a Minimum 41 min 11

    Why do profits fall as society advances? Not, as Adam Smith thought, because of competition among capitals and a general fall of prices, but because accumulation in a country of limited land pushes profit toward a minimum below which people will not save. Britain is always near that minimum and the stationary state. What holds profits up is the destruction of capital in commercial crises, improvements in production, cheap imports of food after the repeal of the Corn Laws, and, above all, the export of capital to colonies and foreign countries.

62. IV.5 Consequences of the Tendency of Profits to a Minimum 14 min 7

    Mill draws practical consequences from the tendency of profits to a minimum. In a rich country where savings overflow, public spending from loans, emigration and colonization, and even large losses of capital do little lasting harm, because the gap is soon refilled by fresh saving that would otherwise go abroad or into speculation. For the same reason, sinking capital in machinery and railways, harmful only where capital is scarce, does not reduce the wages fund in England. The railway mania of 1844–45, he argues, absorbed savings that would have caused a worse crisis. Improvements and the export of capital are what keep profits up.

63. IV.6 Of the Stationary State 15 min 7

    Political economists had always dreaded the stationary state, in which capital and population stop growing. Mill welcomes it. He is “not charmed” by a society of people struggling to get on, and argues that rich countries need not more production but better distribution, secured by restraint on population and laws favouring equality of fortunes. A world crowded to the last acre, with no solitude or wild nature, would be poorer, not richer. A stationary economy would leave room for mental, moral and social progress, and machinery, which has not yet lightened anyone’s toil, could at last shorten labour.

64. IV.7 On the Probable Futurity of the Labouring Classes 1 h 23 min 35

    Mill rejects the paternal “theory of dependence and protection”, arguing that educated, newspaper-reading workers will govern themselves. He expects smaller families, helped by opening occupations to women, and predicts that the wage relation will not last. Workers will not remain hired hands for life. Partnership will replace it, first profit-sharing with capitalists (the Cornish miners, Leclaire, the Briggs collieries), then associations of workers owning their capital, illustrated by the Paris associations of 1848 and the Rochdale Pioneers. Co-operation promises more production and a moral revolution, but Mill defends competition against the socialists as the necessary stimulus to progress.

65. V.1 Of the Functions of Government in General 18 min 5

    Opening Book V on government, Mill notes that the proper limits of state action are now the most disputed political question, with the Continent inclined to overextend it and England to restrict it. He shows that no formula such as “protection against force and fraud” covers what governments are universally accepted to do, including inheritance, defining property, regulating contracts, civil courts, registration, guardianship, coinage and public works. The only common ground is general expediency. He then divides the discussion that follows, beginning with taxation.

66. V.2 On the General Principles of Taxation 54 min 16

    Mill quotes Adam Smith’s four maxims of taxation and reinterprets the first, equality, as equality of sacrifice, rejecting the theory that taxes are payment for protection. He would exempt a minimum income for necessaries and tax the surplus proportionally, opposing a graduated income tax but supporting graduated taxes on inheritance. Life incomes deserve lighter taxation only because their owners must save, and savings should ideally be exempt, since otherwise they are taxed twice. The future “unearned” increase of land rent may justly be taxed, and the old land tax is a public rent-charge. Taxes on capital matter little in a wealthy country.

67. V.3 Of Direct Taxes 38 min 9

    Mill distinguishes direct from indirect taxes and traces the incidence of direct taxes. A tax on rent falls wholly on the landlord. A general tax on profits falls at first on capitalists but, in a rich country, speeds the arrival of the stationary state. A tax on common wages is eventually paid from profits, unless it lowers the workers’ standard of living. A fair income tax is just in principle but unjust in practice through evasion. A house tax is among the fairest taxes, and the part of it falling on urban ground-rents is especially unobjectionable.

68. V.4 Of Taxes on Commodities 56 min 13

    Mill traces the incidence of taxes on commodities. A tax on one article raises its price by at least the tax, and usually more, through regulation, capital advanced and restricted competition. Taxes on necessaries either depress labourers or fall on profits. Tithes and taxes on produce fall at first on consumers, but, following Senior, in the long run mainly on rent by slowing accumulation. Discriminating and protective duties, above all the Corn Laws, waste labour and enrich landlords. Drawing on his essay on international commerce, he shows that export and import duties can shift part of a country’s taxes onto foreigners, which invites retaliation.

69. V.5 Of some other Taxes 17 min 5

    A survey of miscellaneous taxes. Taxes on contracts, especially on sales of land, usually fall on needy sellers and obstruct the passage of land to those who would use it best; Mill would replace them with an equivalent land-tax. The penny post is a fair state monopoly, but heavy postage, advertisement and newspaper duties obstruct trade and popular education. Following Bentham, law taxes are “a tax on redress.” Local taxes should be for specific services, with tolls removed once costs are repaid, and town octrois press hard on urban workers.

70. V.6 Comparison between Direct and Indirect Taxation 22 min 8

    Mill weighs direct against indirect taxation. English dislike of direct taxes is irrational, but making all taxes direct might stoke resistance to useful spending and even tempt default on the debt. The argument that consumers can escape indirect taxes is a fallacy. Since fair income taxation is impracticable, the revenue beyond rent, inheritance and house taxes must come from consumption. He excludes protective duties and taxes on necessaries, favours taxes on luxuries of vanity and on stimulants, and lists seven practical rules, ending with an assessment of the system left by Gladstone’s reforms.

71. V.7 Of a National Debt 21 min 7

    On public debt. Borrowing that draws on capital otherwise employed at home is, on wages-fund reasoning, a tax on labourers, and is the worst of expedients; whether it did so is shown by whether loans raised the rate of interest, as in the French wars. Borrowing surplus capital is defensible, and posterity may share costs that benefit it. Debt should be reduced, but by a surplus revenue, not a levy on property, since all inherit society’s accumulated wealth. Repealing the worst taxes takes priority, and a national deposit bank could replace the funds as a safe investment.

72. V.8 Of the Ordinary Functions of Government, considered as to their Economical Effects 21 min 8

    Mill turns to the economic effects of government’s necessary functions. Insecurity of person and property, above all arbitrary exaction by government itself, destroys industry more than lawlessness does, as the free medieval cities show. Arbitrary or ill-designed taxes, such as the French taille, do more harm than heavy but certain ones. English justice is honest but slow, costly and uncertain, worst in Chancery and in real property law, where landowners have blocked registration of title. Laws that sanction injustice, including slavery and family inequality, damage the moral sentiments of the people.

73. V.9 The same subject continued 1 h 8 min 26

    Mill examines inheritance, partnership and insolvency law. He condemns English primogeniture and entail as instruments of aristocracy that impoverish landlords and keep land from improvers, and the French compulsory division as an invasion of the owner’s liberty of bequest. Partnership law should allow free formation of joint-stock companies, limited liability with publicity, and commandite, since association, including workers’ co-operation, is the future of industry. Insolvency law has swung from severity to laxity; most bankruptcies stem from misconduct, which the debtor should have to disprove.

74. V.10 Of Interferences of Government grounded on Erroneous Theories 1 h 6 min 25

    Mill reviews government interferences grounded on false theories. Protection wastes labour and, in agriculture, taxes consumers for landlords; its only defensible forms are naval security (the old Navigation Laws) and temporary duties to naturalise an industry in a young country. He answers H. C. Carey’s arguments from carriage and soil exhaustion, and condemns colonial trade monopolies, usury laws, price controls on food and monopolies, while defending patents. Laws against workers’ combinations are odious; strikes and unions are legitimate and even necessary to a free labour market, though compulsion and pay-levelling rules are not. He ends with censorship and the intolerance of opinion.

75. V.11 Of the Grounds and Limits of the Laisser-faire or Non-Interference Principle 1 h 42 min 34

    The closing chapter sets the limits of government. Mill distinguishes commanding from merely providing, and argues against extending government: it restricts liberty, swells power, overloads the administration, does most things worse than interested individuals, and deprives people of the practical education of managing their own affairs. Laisser-faire should be the rule. Then come the exceptions: education, children and the insane, perpetual contracts such as marriage, natural monopolies, collective agreements like shorter hours or Wakefield’s colonization that need law to bind everyone, poor relief on the principle of 1834, colonization, lighthouses and science, and whatever a backward society cannot do for itself.