II.6. How Consumption Determines Production, and Revenue Determines Expenditure

National wealth, in its progress, follows a circular movement. Each effect becomes a cause in its turn; each step is governed by the one before it and determines the one after, and the last brings back the first in the same order. National revenue must govern national expenditure; expenditure must absorb the whole of production into the consumption fund; absolute consumption determines an equal or greater reproduction; and from reproduction revenue arises. National wealth goes on increasing, and the state prospering, if a prompt and complete consumption always determines a greater reproduction, and if the other parts of wealth, which stand in relation to one another, follow this movement at an equal pace and continue to grow by degrees. But as soon as the proportion between them is broken, the state declines.

National revenue must govern national expenditure. We have seen that this revenue is of two kinds: a material profit in the case of the rich, a power of working in the case of the poor. The former need consult only themselves in order to exchange this profit on the wealth that makes up their revenue for the various objects of consumption that will satisfy their needs or desires; but if they exceed their revenue, they are necessarily forced to borrow on the very capital of the wealth from which their profits arose; they diminish their profits for the future, and they ruin themselves. The poor, who have only their labour for revenue, are dependent on the upper class before they can spend it. They must realise this labour; they must sell it before they can obtain the enjoyment of its fruits; and they can sell it only to the rich, who, after spending their revenue on themselves, exchange their remaining capital with the poor. The power of working is a revenue as soon as that power is employed; it is nothing if it finds no buyer; and even when employed in full, it rises or falls in value according as it is more or less sought after. The poor man will therefore spend his revenue, his labour, only after he has sold it, and he will regulate his expenditure by the price at which he has sold it. Any expenditure he makes beyond that price, whether he meets it from his small savings or by borrowing, is ruinous for himself and for society. On the other hand, any privation he imposes on himself because that price is meagre or has ceased is equally ruinous for society as soon as it attacks his life, his health or his strength, for it diminishes or destroys his future power of working, which forms so essential a part of the social revenue.

Thus the poor as well as the rich must not exceed their realised revenue in their expenditure, and the whole social expenditure is governed by the social revenue.

On the other hand, national expenditure must absorb the whole of national production into the consumption fund. To follow these calculations more safely, and to simplify these questions, we abstract entirely, for the present, from foreign trade, and suppose an isolated nation. Human society is itself such an isolated nation, and everything that would be true of a nation without commerce is equally true of the human race. We have seen that the sole aim of man’s labour is to provide for his needs; that none of his products has value except what applies to his use; that this use always consists in destroying, sometimes rapidly, sometimes with extreme slowness; but that, in the end, from the moment he begins to enjoy wealth and withdraws it from circulation, he begins to consume it. For wealth to have attained its end it does not matter whether it has already been used up in man’s service; it is enough that it has been withdrawn from the market and changed into enjoyment, or has passed into the consumption fund.

So long as wealth has not received this destination, it holds up the reproduction of the equal quantity that is to replace it. The solitary man, once he has more food, more clothing and more lodging than he can put to his use, stops working. He will not sow so as not to reap, weave so as not to dress, build so as not to dwell. He will no doubt find enjoyment in a certain superfluity, and, if he can, he will create for himself not the necessary but abundance. This abundance is a pleasure of the imagination; yet it has its bounds. When the superfluous no longer flatters his imagination any more than it is necessary to his needs, the solitary man will stop working; he will find that to buy so slight a pleasure with fatigue is to pay too dearly for it. Society is exactly like this man. In dividing up the parts among its members it has not changed the motives that determine it. It wants no more food when there is no one to eat it, and when no one believes he will eat it; it wants no more clothes when no one wishes to put more into his wardrobe, no more dwellings when no one wishes to keep them for his own habitation.

But the limit that consumption sets to reproduction is felt far more strongly in society than in the isolated individual. Even when society counts a very great number of individuals who are badly fed, badly clothed and badly housed, it wants only what it can buy; and, as we have seen, it can buy only with its revenue. If far more objects of luxury are created for it than the rich draw revenue from their capitals, these rich men will perhaps wish to have them, and will see how they might draw new enjoyments from them; yet they will not buy them, on pain of ruining themselves, for to do so they would have to borrow on their capitals, that is, cut into the present revenue of the poor and into their own future revenues. The man, on the other hand, who has produced these objects of luxury, finding no way of exchanging them against the revenue of the rich, and not recovering his capital, will be unable to begin his operation again, and his labour will be suspended.

If far more means of subsistence are created for the poor, not than they could consume, but than they obtain revenue in exchange for their labour, there is no doubt that they would be very willing to be better fed, better clothed and better housed, and yet they will not be; for their desire will not lead the rich to offer them a higher wage or to ask more labour of them. They themselves either have nothing to give in exchange beyond this labour, or, if they have a little fund that they squander, they become the more wretched for it. Corn may therefore remain unsold beside a multitude that is hungry, and the producer, not recovering his capital, will be unable to begin his advances again, so that his labour will cease.

The superabundance of products does, however, bring about a greater consumption through the fall in their price; but the result is no more advantageous. If producers bring to market twice as many luxury goods as the revenue of the rich amounts to, and are determined to sell them, they will be forced to give the whole of them for the whole of that revenue, that is, at a loss of 50 per cent. The rich will believe they have gained as consumers, by getting more cheaply what they hardly wanted; but it is among the rich that the producers are also to be found, and in that capacity they will lose more than they have gained, for they will lose what is necessary to them. Their loss of 50 per cent on the sale of the annual production will be divided between their capital and their revenue. By diminishing their revenue it will reduce their consumption for the following year; by diminishing their capital it will reduce the demand for the labour of the poor, and it will diminish the revenue of the poor in all the years that follow.

If the producers bring to market twice as much subsistence as the wages of the poor are worth, they will likewise be obliged to part with it against the value of those wages, at a loss of 50 per cent. The poor man will benefit as a consumer for that year; but the loss of 50 per cent in the producer’s capital or revenue will be cruelly felt by him from the following year onward. Whatever the rich man has lost of his revenue he will cut from his consumption, and there will be less demand for the fruits of the poor man’s labour; whatever the rich man has lost of his capital he will cut from the wages he pays, and labour, which is the revenue of the poor, will be worth less in consequence.

It is thus that national expenditure, limited by revenue, must absorb the whole of production into the consumption fund.

Absolute consumption determines an equal or greater reproduction. It is at this point that the circle can widen and change into a spiral. Last year produced and consumed as ten; one may hope that next year, producing as eleven, will also consume as eleven. The greater or lesser ease with which consumption has been accomplished indicates the more or less fortunate result of a similar operation carried out the year before. The rich had already set aside something from their revenue to add it to their capital or to the wages they offer the poor, and more work had been done in consequence. If more work has been sold, and sold well, this new capital has given rise to a proportionate revenue, and this revenue calls for a new consumption. The saving made last year will be divided next year: one portion, as revenue, will increase the enjoyments of the rich; another, as wages, will increase the enjoyments of the poor. The operation, carried on with prudence and measure, can therefore continue. But it would be made ruinous by being hurried. It is last year’s revenue that must pay for this year’s production; it is a predetermined quantity that serves as the measure of the indefinite quantity of future labour. The error of those who urge on an unlimited production comes from their having confused this past revenue with future revenue. They have said that to increase labour is to increase wealth, and with it revenue, and in proportion to revenue, consumption. But wealth is increased only by increasing the labour that is demanded, the labour that will be paid at its price; and that price, fixed in advance, is the pre-existing revenue. After all, all that ever happens is that the whole production of the year is exchanged against the whole production of the year before. Now, if production grows gradually, each year’s exchange must cause a small loss, at the same time as it improves the future condition. If this loss is slight and well distributed, each man bears it out of his revenue without complaint; it is in this very thing that national economy consists, and the series of these small sacrifices increases capital and the public fortune. But if there is a great disproportion between the new production and the preceding one, capitals are encroached upon, there is suffering, and the nation goes backward instead of forward.

Finally, revenue arises from reproduction; but it is not production itself that is revenue. Production takes that name, and acts as revenue, only after it has been realised, only after each thing produced has found the consumer who needed or desired it, and who, withdrawing it from circulation to add it to his consumption fund, has given its value in exchange. It is then that the producer makes up his account: from the exchange he has just completed he first frees his capital in full; he then sees the profits that remain to him; he provides in his turn for his enjoyments, and he begins his operations again.

From all that we have just said, it can be seen that a disturbance in the mutual relation between production, revenue and consumption becomes equally harmful to the nation whether production yields a smaller revenue than usual, or part of the capital passes into the consumption fund, or, on the contrary, consumption diminishes and no longer calls for a new production. It is enough for the equilibrium to be broken for the state to suffer. Production may diminish when habits of idleness spread among the labouring classes; capital may diminish when prodigality or luxury become the fashion; consumption, finally, may diminish through causes of poverty unconnected with any diminution of labour; and yet, since it will leave no room for a future reproduction, it will diminish labour in its turn.

Thus nations run dangers that seem contradictory. They can ruin themselves equally by spending too much and by spending too little. A nation spends too much whenever it exceeds its revenue, for it can do so only by encroaching on its capitals, and thus diminishing its future production. It then does what the solitary cultivator would do if he ate the corn he ought to keep back for his sowing. It spends too little whenever, having no foreign trade, it does not consume its production, or, having one, does not consume the excess of its production over its exports; for then it soon finds itself in the position of the solitary cultivator whose granaries were all full far beyond any possibility of consumption, and who, so as not to do useless work, would be obliged to give up sowing his fields.

Fortunately, when the nation does not commit itself to a false system, when its government does not give it an impulse that turns it away from its natural interests, the increases of capital, revenue and consumption most often keep pace with one another of their own accord, without anyone needing to take them in hand; and when one of these three corresponding parts of wealth happens for a time to outrun the others, foreign trade is almost always ready to restore the equilibrium.

It might be thought that when I accuse the most celebrated economists of having paid too little attention to consumption, or to sale, whose decisive importance there is not a merchant who does not feel, I am fighting an error that exists only in my imagination. But I find this opinion reproduced in Mr Ricardo’s latest work, from the point of view most open to criticism; and Mr Say has not opposed in his notes an opinion that is not far from his own, and that up to a certain point may also be attributed to Adam Smith.

“When the annual productions of a country”, says Mr Ricardo, “more than replace its annual consumption, it is said to increase its capital; when its annual consumption is not at least replaced by its annual production, it is said to diminish its capital. Capital may therefore be increased by an increased production, or by a diminished unproductive consumption. If the consumption of the government when increased by the levy of additional taxes be met either by an increased production or by a diminished consumption on the part of the people, the taxes will fall upon revenue, and the national capital will remain unimpaired.”

What then! Is it equally a sign of prosperity for the hat factory of the city of Lyons to have made a hundred thousand hats in 1817 and a hundred and ten thousand in 1818, or to have made a hundred thousand in the latter year but sold only ninety thousand, since in either case there will be ten thousand more? Surely not a hatter could be found who, without thinking himself a great economist, could not answer that if in 1818 a hundred and ten thousand hats were made instead of a hundred thousand, there was a gain, provided they were all sold at their price, and a loss if the extra ten thousand could not be sold; but that if in 1818 only a hundred thousand hats were made, as in 1817, and ten thousand of them were left over that could not be sold, there was certainly a loss.

For there to be any truth in Mr Ricardo’s proposition, foreign trade must be brought into the account; and at once one sees how many modifications it needs.

Suppose the people of Lyons made a hundred thousand hats in 1817 and sold them at twenty francs apiece to the consumers of the city alone, which will make two million francs received by one class of Lyonnais and paid by the other; and suppose that in 1818 they make an equal quantity of hats, which sell at the same price and just as quickly, but in such a way that ten thousand hats are bought by country people and ten thousand Lyonnais go without hats. It could then be said that the latter have made a saving of two hundred thousand francs without the hatters having lost anything. If, on the contrary, in 1818 the hatters sell a hundred thousand hats at the same price and just as quickly to the inhabitants of Lyons, and ten thousand more to the country people, it could be said that the hat factory has increased its capital by two hundred thousand francs without its having cost the consumers of Lyons anything; and the two results may, from a certain point of view, be regarded as equal for the city of Lyons. But it is not the increase of production in the first case, nor the diminution of consumption in the second, that will increase or maintain the national capital; it is the new demand made by consumers able to pay, and to pay at the same price. As for selling to country people rather than to the inhabitants of Lyons, this makes a difference to the balance sheet of the city of Lyons, but none to that of France; and likewise the difference between sales to Frenchmen and to foreigners exists only in the balance sheet of France, not in that of human society. When we examine the latter, by which the commerce of the world is governed, we always see that only an increase in consumption can bring about an increase in reproduction, and that consumption in its turn can be governed only by the revenue of the consumers.