The Principles of Political Economy
by John Stuart Mill

Book 2, Chapter 15

Of Profits

    1. Having treated of the labourer's share of the produce, we
next proceed to the share of the capitalist; the profits of
capital or stock; the gains of the person who advances the
expenses of production -- who, from funds in his possession, pays
the wages of the labourers, or supports them during the work; who
supplies the requisite building, materials, and tools or
machinery. and to whom, by the usual terms of the contract, the
produce belongs, to be disposed of at his pleasure. After
indemnifying him for his outlay, there commonly remains a
surplus, is his profit; the net income from his capital: the
amount which he can afford to spend in necessaries or pleasures,
or from which by further saving he can add to his wealth.
    As the wages of the labourer are the remuneration of labour,
so the profits of the capitalist are properly, according to Mr.
Senior's well-chosen expression, the remuneration of abstinence.
They are what he gains by forbearing to consume his capital for
his own uses, and allowing it to be consumed by productive
labourers for their uses. For this forbearance he requires a
recompense. Very often in personal enjoyment he would be a gainer
by squandering his capital, the capital amounting to more than
the sum of the profits which it will yield during the years he
can expect to live. But while he retains it undiminished, he has
always the power of consuming it if he wishes or needs; he can
bestow it upon others at his death; and in the meantime he
derives from it an income, which he can without impoverishment
apply to the satisfaction of his own wants or inclinations.
    Of the gains, however, which the possession of a capital
enables a person to make, a part only is properly an equivalent
for the use of the capital itself; namely, as much as a solvent
person would be willing to pay for the loan of it. This, which as
everybody knows is called interest, is all that a person is
enabled to get by merely abstaining from the immediate
consumption of his capital, and allowing it to be used for
productive purposes by others. The remuneration which is obtained
in any country for mere abstinence, is measured by the current
rate of interest on the best security; such security as precludes
any appreciable chance of losing the principal. What a person
expects to gain, who superintends the employment of his own
capital, is always more, and generally much more, than this. The
rate of profit greatly exceeds the rate of interest. The surplus
is partly compensation for risk. By lending his capital, on
unexceptionable security, he runs little or no risk. But if he
embarks in business on his own account, he always exposes his
capital to some, and in many cases to very great, danger of
partial or total loss. For this danger he must be compensated,
otherwise he will not incur it. He must likewise be remunerated
for the devotion of his time and labour. The control of the
operations of industry usually belongs to the person who supplies
the whole or the greatest part of the funds by which they are
carried on, and who, according to the ordinary arrangement, is
either alone interested, or is the person most interested (at
least directly), in the result. To exercise this control with
efficiency, if the concern is large and complicated, requires
great assiduity, and often, no ordinary skill. This assiduity and
skill must he remunerated.
    The gross profits from capital, the gains returned to those
who supply the funds for production, must suffice for these three
purposes. They must afford a sufficient equivalent for
abstinence, indemnity for risk, and remuneration for the labour
and skill required for superintendence. These different
compensations may be either paid to the same, or to different
persons. The capital, or some part of it, may be borrowed: may
belong to some one who does not undertake the risks or the
trouble of business. In that case, the lender, or owner, is the
person who practises the abstinence; and is remunerated for it by
the interest paid to him, while the difference between the
interest and the gross profits remunerates the exertions and
risks of the undertaker.(1*) Sometimes, again, the capital, or a
part of it, is supplied by what is called a sleeping partner; who
shares the risks of the employment, but not the trouble, and who,
in consideration of those risks, receives not a mere interest,
but a stipulated share of the gross profits. Sometimes the
capital is supplied and the risk incurred by one person, and the
business carried on exclusively in his name, while the trouble of
management is made over to another, who is engaged for that
purpose at a fixed salary. Management, however, by hired
servants, who have no interest in the result but that of
preserving their salaries, is proverbially inefficient, unless
they act under the inspecting eye, if not the controlling hand,
of the person chiefly interested: and prudence almost always
recommends giving to a manager not thus controlled, a
remuneration partly dependent on the profits; which virtually
reduces the case to that of a sleeping partner. Or finally, the
same person may own the capital, and conduct the business;
adding, if he will and can, to the management of his own capital,
that of as much more as the owners may be willing to trust him
with. But under any or all of these arrangements, the same three
things require their remuneration, and must obtain it from the
gross profit: abstinence, risk, exertion. And the three parts
into which profit may be considered as resolving itself, may be
described respectively as interest, insurance, and wages of
superintendence.

    2. The lowest rate of profit which can permanently exist, is
that which is barely adequate, at the given place and time, to
afford an equivalent for the abstinence, risk, and exertion
implied in the employment of capital. From the gross profit, has
first to be deducted as much as will form a fund sufficient on
the average to cover all losses incident to the employment. Next,
it must afford such an equivalent to the owner of the capital for
forbearing to consume it, as is then and there a sufficient
motive to him to persist in his abstinence. How much will be
required to form this equivalent, depends on the comparative
value placed, in the given society, upon the present and the
future: (in the words formerly used) on the strength of the
effective desire of accumulation. Further, after covering all
losses, and remunerating the owner for forbearing to consume,
there must be something left to recompense the labour and skill
of the person who devotes his time to the business. This
recompense too must be sufficient to enable at least the owners
of the larger capitals to receive for their trouble, or to pay to
some manager for his, what to them or him will be a sufficient
inducement for undergoing it. If the surplus is no more than
this, none but large masses of capital will be employed
productively; and if it did not even amount to this, capital
would be withdrawn from production, and unproductively consumed,
until, by an indirect consequence of its diminished amount, to be
explained hereafter, the rate of profit was raised.
    Such, then, is the minimum of profits: but that minimum is
exceedingly variable, and at some times and places extremely low;
on account of the great variableness of two out of its three
elements. That the rate of necessary remuneration for abstinence,
or in other words the effective desire of accumulation, differs
widely in different states of society and civilization, has been
seen in a former chapter. There is a still wider difference in
the element which consists in compensation for risk. I am not now
speaking of the differences in point of risk between different
employments of capital in the same society, but of the very
different degrees of security of property in different states of
society. Where, as in many of the governments of Asia, property
is in perpetual danger of spoliation from a tyrannical
government, or from its rapacious and ill-controlled officers;
where to possess or to be suspected of possessing wealth, is to
be a mark not only for plunder, but perhaps for personal
ill-treatment to extort the disclosure and surrender of hidden
valuables; or where, as in the European Middle Ages, the weakness
of the government, even when not itself inclined to oppress,
leaves its subjects exposed without protection or redress to
active spoilation, or audacious withholding of just rights, by
any power individual; the rate of profit which persons of average
dispositions will require, to make them forego the immediate
enjoyment of what they happen to possess, for the purpose of
exposing it and themselves to these perils, must be something
very considerable. And these contingencies affect those who live
on the mere interest of their capital, in common with those who
personally engage in production. In a generally secure state of
society, the risks which may be attendant on the nature of
particular employments seldom fall on the person who lends his
capital, if he lends on good security; but in a state of society
like that of many parts of Asia, no security (except perhaps the
actual pledge of gold or jewels) is good: and the mere possession
of a hoard, when known or suspected, exposes it and the possessor
to risks, for which scarcely any profit he could expect to obtain
would be an equivalent; so that there would be still less
accumulation than there is, if a state of insecurity did not also
multiply the occasions on which the possession of a treasure may
be the means of saving life or averting serious calamities. Those
who lend, under these wretched governments, do it at the utmost
peril of never being paid. In most of the native states of India,
the lowest terms on which any one will lend money, even to the
government, are such, that if the interest is paid only for a few
years, and the principal not at all, the lender is tolerably well
indemnified. If the accumulation of principal and compound
interest is ultimately compromised at a few shil1ings in the
pound, he has generally made an advantageous bargain.

    3. The remuneration of capital in different employments, much
more than the remuneration of labour, varies according to the
circumstances which render one employment more attractive, or
more repulsive, than another. The profits, for example, of retail
trade, in proportion to the capital employed, exceed those of
wholesale dealers or manufacturers, for this reason among others,
that there is less consideration attached to the employment. The
greatest, however, of these differences, is that caused by
difference of risk. The profits of a gunpowder manufacturer must
be considerably greater than the average, to make up for the
peculiar risks to which he and his property are constantly
exposed. When, however, as in the case of marine adventure, the
peculiar risks are capable of being, and commonly are, commuted
for a fixed payment, the premium of insurance takes its regular
place among the charges of production, and the compensation which
the owner of the ship or cargo receives for that payment, does
not appear in the estimate of his profits, but is included in the
replacement of his capital.
    The portion, too, of the gross profit, which forms the
remuneration for the labour and skill of the dealer or producer,
is very different in different employments. This is the
explanation always given of the extraordinary rate of
apothecaries' profit; the greatest part, as Adam Smith observes,
being frequently no more than the reasonable wages of
professional attendance; for which, until a late alteration of
the law, the apothecary could not demand any remuneration, except
in the prices of his drugs. Some occupations require a
considerable amount of scientific or technical education, and can
only be carried on by persons who combine with that education a
considerable capital. Such is the business of an engineer, both
in the original sense of the term, a machine-maker, and in its
popular or derivative sense, an undertaker of public works. These
are always the most profitable employments. There are cases,
again, in which a considerable amount of labour and skill is
required to conduct a business necessity of limited extent. In
such cases, a higher than common rate of profit is necessary to
yield only the common rate of remuneration. "In a small
seaport-town," says Adam Smith, "a little grocer will make for or
fifty per cent upon a stock of a single hundred pounds, while a
considerable wholesale merchant in the same place will scarce
make eight or ten per cent upon a stock of ten thousand. The
trade of the grocer may be necessary for the conveniency of the
inhabitants, and the narrowness of the market may not admit the
employment of a larger capital in the business. The man, however,
must not only live by his trade, but live by it suitably to the
qualifications which it requires. Besides possessing a little
capital, he must be able to read, write, and account, and must be
a tolerable judge, too, of perhaps fifty or sixty different sorts
of goods, their prices, qualities, and the markets where they are
to be had cheapest. Thirty or forty pounds a year cannot be
considered as too great a recompense for the labour of a person
so accomplished. Deduct this from the seemingly great profits of
his capital, and little more will remain, perhaps, than the
ordinary profits of stock. The greater part of the apparent
profit is, in this case, too, real wages."
    All the natural monopolies (meaning thereby those which are
created by circumstances, and not by law) which produce or
aggravate the disparities in the remuneration of different kinds
of labour, operate similarly between different employments of
capital. If a business can only be advantageously carried on by a
large capital, this in most countries limits so narrowly the
class of persons who can enter into the employment, that they are
enabled to keep their rate of profit above the general level. A
trade may also, from the nature of the case, be confined to so
few that profits may admit of being kept up by a combination
among the dealers. It is well known that even among so numerous a
body as the London booksellers, this sort of combination long
continued to exist. I have already mentioned the case of the gas
and water companies.

    4. After due allowance is made for these various causes of
inequality, namely, differences in the risk or agreeableness of
different employments, and natural or artificial monopolies; the
rate of profit on capital in all employments tends to an
equality. Such is the proposition usually laid down by political
economists, and under proper explanations it is true.
    That portion of profit which is properly interest, and which
forms the real remuneration for abstinence, is strictly the same,
at the same time and place, whatever be the employment. The rate
of interest on equally good security, does not vary according to
the destination of the principal, though it does vary from time
to time very much, according to the circumstances of the market.
There is no employment in which, in the present state of
industry, competition is so active and incessant as in the
lending and borrowing of money. All persons in business are
occasionally, and most of them constantly, borrowers: while all
persons not in business, who possess monied property are lender.
Between these two great bodies there is a numerous, keen, and
intelligent class of middlemen, composed of bankers,
stockbrokers, discount brokers, and others, alive to the
slightest breath of probable gain. The smallest circumstance, or
the most transient impression on the public mind, which tends to
an increase or diminution of the demand for loans either at the
time or prospectively, operates immediately on the rate of
interest: and circumstances in the general state of trade, really
tending to cause this difference of demand, are continually
occurring, sometimes to such an extent, that the rate of interest
on the hest mercantile bills has been known to vary in little
more than a year (even without the occurrence of the great
derangement called a commercial crisis) from four, or less, to
eight or nine per cent. But, at the same time and place, the rate
of interest is the same, to all who can give equally good
security. The market rate of interest is at all times a known and
definite thing.
    It is far otherwise with gross profit; which, though (as will
presently be seen) it does not vary much from employment to
employment, varies very greatly from individual to individual,
and can scarcely be in any two cases the same. It depends on the
knowledge, talents, economy, and energy of the capitalist
himself, or of the agents whom he employs; on the accidents of
personal connexion; and even on chance. Hardly any two dealers in
the same trade, even if their commodities are equally good and
equally cheap, carry on their business at the same expense, or
turn over their capital in the same time. That equal capitals
give equal profits, as a general maxim of trade, would be as
false as that equal age or size gives equal bodily strength, or
that equal reading or experience gives equal knowledge. The
effect depends as much upon twenty other things, as upon the
single cause specified.
    But though profits thus vary, the parity on the whole, of
different modes of employing capital (in the absence of any
natural or artificial monopoly) is, in a certain, and a very
important sense, maintained. On an average (whatever may be the
occasional fluctuation) the various employments of capital are on
such a footing as to hold out not equal profits, but equal
expectations of profit, to persons of average abilities and
advantages. By equal, I mean after making compensation for any
inferiority in the agreeableness or safety of an employment. If
the case were not so; if there were, evidently, and to common
experience, more favourable chances of pecuniary success in one
business than in others, more persons would engage their capital
in the business, or would bring up their sons to it; which in
fact always happens when a business, like that of an engineer at
present, or like any newly established and prosperous
manufacture, is seen to be a growing and thriving one. If, on the
contrary, a business is not considered thriving; if the chances
of profit in it are thought to be inferior to those in other
employments; capital gradually leaves it, or at least new capital
is not attracted to it; and by this change in the distribution of
capital between the less profitable and the more profitable
employments, a sort of balance is restored. The expectation of
profit, therefore, in different employments, cannot long continue
very different: they tend to a common average, though they are
generally oscillating from one side to the other side of the
medium.
    This equalizing process, commonly described as the transfer
of capital from one employment to another, is not necessarily the
onerous, slow, and almost impracticable operation which it is
very often represented to be. In the first place, it does not
always imply the actual removal of capital already embarked in an
employment. In a rapidly progressive state of capital, the
adjustment often takes place by means of the new accumulations of
each year, which direct themselves in preference towards the more
thriving trades. Even when a real transfer of capital is
necessary, it is by no means implied that any of those who are
engaged in the unprofitable employment, relinquish business and
break up their establishments. The numerous and multifarious
channels of credit. through which, in commercial nations,
unemployed capital diffuses itself over the field of employment,
flowing over in greater abundance to the lower levels, are the
means by which the equalization is accomplished. The process
consists in a limitation by one class of dealers or producers,
and an extension by the other, of that portion of their business
which is caRed on with borrowed capital. There is scarcely any
dealer or producer on a considerable scale, who confines his
business to what can be carried on by his own funds. When trade
is good, he not only uses to the utmost his own capital, but
employs, in addition, much of the credit which that capital
obtains for him. When, either from over-supply or from some
slackening in the demand for his commodity, he finds that it
sells more slowly or obtains a lower price, he contracts his
operations, and does not apply to bankers or other money dealers
for a renewal of their advances to the same extent as before. A
business which is increasing holds out, on the contrary, a
prospect of profitable employment for a larger amount of this
floating capital than previously, and those engaged in it become
applicants to the money dealers for larger advances, which, from
their improving circumstances, they have no difficulty in
obtaining. A different distribution of floating capital between
two employments has as much effect in restoring their profits to
an equilibrium, as if the owners of an equal amount of capital
were to abandon the one trade and carry their capital into the
other. This easy, and as it were spontaneous, method of
accommodating production to demand, is quite sufficient to
correct any inequalities arising from the fluctuations of trade,
or other causes of ordinary occurrence. In the case of an
altogether declining trade, in which it is necessary that the
production should be, not occasionally varied, but greatly and
permanently diminished, or perhaps stopped altogether, the
process of extricating the capital is, no doubt, tardy and
difficult, and almost always attended with considerable loss;
much of the capital fixed in machinery, buildings, permanent
works, &c. being either not applicable to any other purpose, or
only applicable after expensive alterations; and time being
seldom given for effecting the change in the mode in which it
would be effected with least loss, namely, by not replacing the
fixed capital as it wears out. There is besides, in totally
changing the destination of a capital, so great a sacrifice of
established connexion, and of acquired skill and experience, that
people are always very slow in resolving upon it, and hardly ever
do so until long after a change of fortune has become hopeless.
These, however, are distinctly exceptional cases, and even in
these the equalization is at last effected. It may also happen
that the return to equilibrium is considerably protracted, when,
before one inequality has been corrected, another cause of
inequality arises; which is said to have been continually the
case during a long series of years, with the production of cotton
in the Southern States of North America; the commodity having
been upheld at what was virtually a monopoly price, because the
increase of demand, from successive improvements in the
manufacture, went on with a rapidity so much beyond expectation
that for many years the supply never completely overtook it. But
it is not often that a succession of disturbing causes, all
acting in the same direction, are known to follow one another
with hardly any interval. Where there is no monopoly, the profits
of a trade are likely to range sometimes above and sometimes
below the general level, but tending always to return to it; like
the oscillations of the pendulum.
    In general, then, although profits are very different to
different individuals, and to the same individual in different
years, there cannot be much diversity at the same time and place
in the average profits of different employments, (other than the
standing differences necessary to compensate for difference of
attractiveness,) except for short periods, or when some great
permanent revulsion has overtaken a particular trade. If any
popular impression exists that some trades are more profitable
than others, independently of monopoly, or of such rare accidents
as have been noticed in regard to the cotton trade, the
impression is in all probability fallacious, since if it were
shared by those who have greatest means of knowledge and motives
to accurate examination, there would take place such an influx of
capital as would soon lower the profits to the common level. It
is true that, to persons with the same amount of original means,
there is more chance of making a large fortune in some
employments than in others. But it would be found that in those
same employments, bankruptcies also are more frequent, and that
the chance of greater success is balanced by a greater
probability of complete failure. Very often it is more than
balanced: for, as was remarked in another case, the chance of
great prizes operates with a greater degree of strength than
arithmetic will warrant, in attracting competitors; and I doubt
not that the average gains, in a trade in which large fortunes
may be made, are lower than in those in which gains are slow,
though comparatively sure, and in which nothing is to be
ultimately hoped for beyond a competency. The timber trade of
Canada is one example of an employment of capital partaking so
much of the nature of a lottery, as to make it an accredited
opinion that, taking the adventurers in the aggregate, there is
more money lost by the trade than gained by it; in other words,
that the average rate of profit is less than nothing. In such
points as this, much depends on the characters of nations,
according as they partake more or less of the adventurous, or, as
it is called when the intention is to blame it, the gambling
spirit. This spirit is much stronger in the United States than in
Great Britain; and in Great Britain than in any country of the
Continent. In some Continental countries the tendency is so much
the reverse, that safe and quiet employments probably yield a
less average profit to the capital engaged in them, than those
which offer greater gains at the price of greater hazards.
    It must not however be forgotten, that even in the countries
of most active competition, custom also has a considerable share
in determining the profits of trade. There is sometimes an idea
afloat as to what the profit of an employment should be, which
though not adhered to by all the dealers, nor perhaps rigidly by
any, still exercises a certain influence over their operations.
There has been in England a kind of notion, how widely prevailing
I know not, that fifty per cent is a proper and suitable rate of
profit in retail transactions: understand, not fifty per cent on
the whole capital, but an advance of fifty per cent on the
wholesale prices; from which have to be defrayed bad debts, shop
rent, the pay of clerks, shopmen, and agents of all descriptions,
in short all the expenses of the retail business. If this custom
were universal, and strictly adhered to, competition indeed would
still operate, but the consumer would not derive any benefit from
it, at least as to price; the way in which it would diminish the
advantages of those engaged in the retail trade, would be by a
greater subdivision of the business. In some parts of the
Continent the standard is as high as a hundred per cent. The
increase of competition however, in England at least, is rapidly
tending to break down customs of this description. In the
majority of trades (at least in the great emporia of trade),
there are now numerous dealers whose motto is, "small gains and
frequent" -- a great business at low prices, rather than high
prices and few transactions; and by turning over their capital
more rapidly, and adding to it by borrowed capital when needed,
the dealers often obtain individually higher profits; though they
necessarily lower the profits of those among their competitors,
who do not adopt the same principle. Nevertheless, competition,
as remarked(2*) in a previous chapter, has, as yet, but a limited
dominion over retail prices; and consequently the share of the
whole produce of land and labour which is absorbed in the
remuneration of mere distributors, continues exorbitant; and
there is no function in the economy of society which supports a
number of persons so disproportioned to the amount of work to be
performed.

    5. The preceding remarks have, I hope, sufficiently
elucidated what is meant by the common phrase, "the ordinary rate
of profit;" and the sense in which, and the limitations under
which, this ordinary rate has a real existence. It now remains to
consider, what causes determine its amount.
    To popular apprehension it seems as if the profits of
business depended upon prices. A producer or dealer seems to
obtain his profits by selling his commodity for more than it cost
him. Profit altogether, people are apt to think, is a consequence
of purchase and sale. It is only (they suppose) because there are
purchasers for a commodity, that the producer of it is able to
make any profit. Demand -- customers -- a market for the
commodity, are the cause of the gains of capitalists. It is by
the sale of their goods, that they replace their capital, and add
to its amount.
    This, however, is looking only at the outside surface of the
economical machinery of society. In no case, we find, is the mere
money which passes from one person to another, the fundamental
matter in any economical phenomenon. If we look more narrowly
into the operations of the producer, we shall perceive that the
money he obtains for his commodity is not the cause of his having
a profit, but only the mode in which his profit is paid to him.
    The cause of profit is, that labour produces more than is
required for its support. The reason why agricultural capital
yields a profit, is because human beings can grow more food, than
is necessary to feed them while it is being grown, including the
time occupied in constructing the tools, and making all other
needful preparations: from which it is a consequence, that if a
capitalist undertakes to feed the labourers on condition of
receiving the produce, he has some of it remaining for himself
after replacing his advances. To vary the form of the theorem:
the reason why capital yields a profit, is because food,
clothing, materials, and tools, last longer than the time which
was required to produce them; so that if a capitalist supplies a
party of labourers with these things, on condition of receiving
all they produce, they will, in addition to reproducing their own
necessaries and instruments, have a portion of their time
remaining, to work for the capitalist. We thus see that profit
arises, not from the incident of exchange, but from the
productive power of labour; and the general profit of the country
is always what the productive power of labour makes it, whether
any exchange takes place or not. If there were no division of
employments, there would be no buying or selling, but there would
still be profit. If the labourers of the country collectively
produce twenty per cent more than their wages, profits will be
twenty per cent, whatever prices may or may not be. The accidents
of price may for a time make one set of producers get more than
the twenty per cent, and another less, the one commodity being
rated above its natural value in relation to other commodities,
and the other below, until prices have again adjusted themselves;
but there will always be just twenty per cent divided among them
all.
    I proceed, in expansion of the considerations thus briefly
indicated, to exhibit more minutely the mode in which the rate of
profit is determined.

    6. I assume, throughout, the state of things, which, where
the labourers and capitalists are separate classes, prevails,
with few exceptions, universally; namely, that the capitalist
advances the whole expenses, including the entire remuneration of
the labourer. That he should do so, is not a matter of inherent
necessity; the labourer might wait until the production is
complete, for all that part of his wages which exceeds mere
necessaries; and even for the whole, if he has funds in hand,
sufficient for his temporary support. But in the latter case, the
labourer is to that extent really a capitalist, investing capital
in the concern, by supplying a portion of the funds necessary for
carrying it on; and even in the former case he may be looked upon
in the same light, since, contributing his labour at less than
the market price, he may be regarded as lending the difference to
his employer, and receiving it back with interest (on whatever
principle computed) from the proceeds of the enterprise.
    The capitalist, then, may be assumed to make all the
advances, and receive all the produce. His profit consists of the
excess of the produce above the advances; his rate of profit is
the ratio which that excess bears to the amount advanced. But
what do the advances consist of?
    It is, for the present, necessary to suppose, that the
capitalist does not pay any rent; has not to purchase the use of
any appropriated natural agent. This indeed is scarcely ever the
exact truth. The agricultural capitalist, except when he is the
owner of the soil he cultivates, always, or almost always, pays
rent: and even in manufactures, (not to mention ground-rent,) the
materials of the manufacture have generally paid rent, in some
stage of their production. The nature of rent, however, we have
not yet taken into consideration; and it will hereafter appear,
that no practical error, on the question we are now examining, is
produced by disregarding it.
    If, then, leaving rent out of the question, we inquire in
what it is that the advances of the capitalist, for purposes of
production, consist, we shall find that they consist of wages of
labour.
    A large portion of the expenditure of every capitalist
consists in the direct payment of wages. What does not consist of
this, is composed of materials and implements, including
buildings. But materials and implements are produced by labour;
and as our supposed capitalist is not meant to represent a single
employment, but to be a type of the productive industry of the
whole country, we may suppose that he makes his own tools, and
raises his own materials. He does this by means of previous
advances, which, again, consist wholly of wages. If we suppose
him to buy the materials and tools instead of producing them, the
case is not altered: he then repays to a previous producer the
wages which that previous producer has paid. It is true, he
repays it to him with a profit; and if he had produced the things
himself, he himself must have had that profit, on this part of
his outlay, as well as on every other part. The fact, however,
remains, that in the whole process of production, beginning with
the materials and tools, and ending with the finished product,
all the advances have consisted of nothing but wages; except that
certain of the capitalists concerned have, for the sake of
general convenience, had their share of profit paid to them
before the operation was completed. Whatever, of the ultimate
product, is not profit, is repayment of wages.

    7. It thus appears that the two elements on which, and which
alone, the gains of the capitalists depend, are, first, the
magnitude of the produce, in other words, the productive power of
labour; and secondly, the proportion of that produce obtained by
the labourers themselves; the ratio, which the remuneration of
the labourers bears to the amount they produce. These two things
form the data for determining the gross amount divided as profit
among all the capitalists of the country; but the rate of profit,
the percentage on the capital, depends only on the second of the
two elements, the 1abourer's proportional share, and not on the
amount to be shared. If the produce of labour were doubled, and
the labourers obtained the same proportional share as before,
that is, if their remuneration was also doubled, the capitalists,
it is true, would gain twice as much; but as they would also have
had to advance twice as much, the rate of their profit would be
only the same as before.
    We thus arrive at the conclusion of Ricardo and others, that
the rate of profits depends on wages; rising as wages fall, and
falling as wages rise. In adopting, however, this doctrine, I
must insist upon making a most necessary alteration in its
wording. Instead of saying that profits depend on wages, let us
say (what Ricardo really meant) that they depend on the cost of
labour.
    Wages, and the cost of labour; what labour brings in to the
labourer, and what it costs to the capitalist; are ideas quite
distinct, and which it is of the utmost importance to keep so.
For this purpose it is essential not to designate them, as is
almost always done, by the same name. Wages, in public
discussions, both oral and printed, being looked upon from the
point of view of the payers, much oftener than from that of the
receivers, nothing is more common than to say that wages are high
or low, meaning only that the cost of labour is high or low. The
reverse of this would be oftener the truth: the cost of labour is
frequently at its highest where wages are lowest. This may arise
from two causes. In the first place, the labour, though cheap,
may be inefficient. In no European country are wages so low as
they are (or at least were) in Ireland: the remuneration of an
agricultural labourer in the west of Ireland not being more than
half the wages of even the lowest-paid Englishman, the
Dorsetshire labourer. But if, from inferior skill and industry,
two days' labour of an Irishman accomplished no more work than an
English labourer performed in one, the Irishman's labour cost as
much as the Englishman's, though it brought in so much less to
himself. The capitalist's profit is determined by the former of
these two things, not the latter. That a difference to this
extent really existed in the efficiency of the labour, is proved
not only by abundant testimony, but by the fact, that
notwithstanding the lowness of wages, profits of capital are not
understood to have been higher in Ireland than in England.
    The other cause which renders wages, and the cost of labour,
no real criteria of one another, is the varying costliness of the
articles which the labourer consumes. If these are cheap, wages,
in the sense which is of importance to the labourer, may be high,
and yet the cost of labour may be low; if dear, the labourer may
be wretchedly off, though his labour may cost much to the
capitalist. This last is the condition of a country over-peopled
in relation to its land; in which, food being dear, the poorness
of the labourer's real reward does not prevent labour from
costing much to the purchaser, and low wages and low profits
co-exist. The opposite case is exemplified in the United States
of America. The labourer there enjoys a greater abundance of
comforts than in any other country of the world, except some of
the newest colonies; but owing to the cheap price at which these
comforts can be obtained (combined with the great efficiency of
the labour), the cost of labour to the capitalist is at least not
higher, nor the rate of profit lower, than in Europe.
    The cost of labour, then, is, in the language of mathematics,
a function of three variables: the efficiency of labour; the
wages of labour (meaning thereby the real reward of the
labourer); and the greater or less cost at which the articles
composing that real reward can be produced or procured. It is
plain that the cost of labour to the capitalist must be
influenced by each of these three circumstances, and by no
others. These, therefore, are also the circumstances which
determine the rate of profit; and it cannot be in any way
affected except through one or other of them. If labour generally
became more efficient, without being more highly rewarded; if,
without its becoming less efficient, its remuneration fell, no
increase taking place in the cost of the articles composing that
remuneration; or if those articles became less costly, without
the labourer's obtaining more of them; in any one of these three
cases, profits would rise. If, on the contrary, labour became
less efficient (as it might do from diminished bodily vigour in
the people, destruction of fixed capital, or deteriorated
education); or if the labourer obtained a higher remuneration,
without any increased cheapness in the things composing it; or
if, without his obtaining more, that which he did obtain became
more costly; profits, in all these cases, would suffer a
diminution. And there is no other combination of circumstances,
in which the general rate of profit of a country, in all
employments indifferently, can either fall or rise.
    The evidence of these propositions can only be stated
generally, though, it is hoped, conclusively, in this stage of
our subject. It will come out in greater fulness and force when,
having taken into consideration the theory of Value and Price, we
shall be enabled to exhibit the law of profits in the concrete --
in the complex entanglement of circumstances in which it actually
works. This can only be done in the ensuing Book. One topic still
remains to be discussed in the present one, so far as it admits
of being treated independently of considerations of Value; the
subject of Rent; to which we now proceed.

NOTES:

1. It is tobe regretted that this word, in this sense, is not
familiar to an English ear. French political economists enjoy a
great advantage in being able to speak currently of les profits
de l'entrpreneur.

2. Vide supra, book ii. ch. iv. sect. 3.