that, as population increases, the augmented demand for food causes a resort to less fertile or less conveniently situated soils. The required food is therefore produced. at a greater proportionate expenditure of capital and labour; in other words, a given amount of labour and capital is less productive of wealth, and wages and interest consequently decline.

The Law of Diminishing Productiveness. A similar effect is produced if the additional food required has to be raised upon land already in cultivation. When agriculture has advanced to a certain stage, in the absence of any special discoveries doubling the capital and labour applied to any particular land does not double the produce; "or to express the same thing in other words every increase of produce is obtained by a more than proportional increase in the application of labour to the land." J. S. Mill, Principles of Pol. E. Vol 1. p. 217. Every successive dose of capital applied to the land yields a less and less return. If it were otherwise, if every dose of capital yielded a proportional return, the whole economic condition of the world would be changed. A single farm might raise produce sufficient for a whole nation; and the only limit to the increase of population would be that of finding standing-room.

The law of diminishing productiveness shews why profits and wages tend to decline, and why they are much higher in a new than in an old country.

The following illustration will suffice to prove that, in fact, this is the case. In England wages and interest are much lower than they are in Australia. In England the margin of cultivation is very low soils are here cultivated, with the greatest care, which would not be used at all in Australia. The same amount of capital and labour, expended in agriculture, is much more productive of wealth in Australia than in England; hence the reward of labour and capital is greater in the former country than in the latter. From these facts it is proved that profits do not depend upon the wages of labour, but upon the efficiency of labour; that is to say, upon the proportion which the amount of wages paid bears to the productiveness of labour. In Australia wages.

are much higher than in England, but the cost of labour is less because labour is much more productive in Australia than in England. That this is true is proved by the fact that profits are much greater in Australia than in England, and the rate of interest is also higher.

High prices do not denote large profits. Nothing can be more erroneous than to suppose that high prices invariably denote large profits. It is true that a sudden demand for a commodity sometimes causes its price to be temporarily raised beyond what is sufficient to return the ordinary rate of profits and wages to its producers. But, as frequently explained, the competition of capital and labour causes these high wages and profits to be reduced; prices being permanently regulated, where free competition prevails, by cost of production. In the previous chapter it was explained that high prices do not produce high wages; the same reasoning applies to the case now before us. Take as an example the price of cotton goods. The cost of production consists of the following elements :-labour, abstinence and risk; the cost of an article may also be increased by taxation. An increase in any of these elements will increase the cost of production, and consequently tend to raise the price of commodities. For instance the labour necessary to the production of the cotton may be greatly increased, owing to the sudden failure of the ordinary sources of supply; or increased taxation may be imposed on the raw material or on the manufactured cotton; in either of these cases prices will be augmented without causing any increase in the profits of capital; in fact the increased cost of all the other elements of cost of production would actually tend to diminish the profits of capital; and therefore higher prices would be accompanied by a decline in the rate of profit. At the time of the American war, the difficulty and expense of obtaining raw cotton very greatly increased the price of cotton goods; at the same time manufacturers were sustaining heavy losses, and wages were so much reduced that the memorable cotton famine ensued. That high prices do not make high profits is shewn by the simple consideration that the rate of profit represents a proportion, and that a proportion cannot be

determined by one factor simply, but depends on the relation in which this stands to the other. The rate of interest in fact depends on the costliness of the other elements of cost of production, and as by far the most important of these elements is labour, it is sufficiently accurate to say, as stated above, that the rate of interest depends on the cost of labour. It has frequently been stated that both profits and wages must ultimately be contained in the price realised by the article produced by the joint exertion of capital and labour. Hence it is seen that the greater the proportion of this price which has to be conceded to labour, in the form of wages, the less remains to be enjoyed by the capitalist, as profits. Cost of Labour to the Capitalist, therefore, depends on the proportion of the value of the product, due to the joint exertions of capital and labour, which is secured as the reward of labour.

On what does the Cost of labour depend? It is now therefore desirable to ascertain accurately on what the cost of labour to the capitalist depends. Mr Mill has described the cost of labour as a "function of three variables." That is to say, the cost of labour to the capitalist is influenced by three circumstances, each of which is liable to variations.

These circumstances are

I. "The efficiency of labour.

2. The wages of labour (meaning thereby the real reward of the labourer).

3. The greater or less cost at which the articles composing that real reward can be produced or purchased.”

If the efficiency of labour is increased while the wages of labour and the cost of the necessaries of life are unaltered, the cost of labour to the capitalist is diminished. If the wages of labour are increased, without a corresponding increase in the efficiency of labour, the cost of labour to the capitalist is increased.

If the articles composing the real reward of the labourer become less costly, without his obtaining more of them, wages decline and the cost of labour, to the capitalist, is diminished.

The rate of profit depends upon the share of the total

produce resulting from a given exertion of labour and abstinence which is allotted to labour; and it will be found on consideration that any variations in the general rate of profit must be produced by variations in one or more of the three circumstances above enumerated.

An Example. In such a country as Australia the efficiency of labour is very great, owing to the large extent of fertile land; and the cost at which the necessaries of life can be obtained is for the same reason very small. The circumstances are sufficient to produce, a very high rate of profit, together with a high rate of wages.

Workmen are not ultimately benefited by a rise in wages which causes their employers' profits to sink below the ordi

nary rate. In explaining the relation between wages and profits in the last chapter, it was said that the labourers in any particular employment derive no permanent benefit from a rise in wages which reduces their employers' profits below the ordinary rate. But it may be urged that if all the working men in such a nation as Great Britain combined in their demand for higher wages, they would be able to obtain a larger share of the wealth produced by capital and labour, and the current rate of profit prevailing in this country would be reduced. Laying aside the innumerable obstacles to such perfect organization and unanimity amongst all classes of workmen which such a demand would require, let it be supposed that a universal demand for higher wages takes place throughout the United Kingdom, that the demand is conceded, that profits are decreased, and that the rate of interest is reduced from 3 to 2 per cent. Such a reduction would tend in two ways to reduce the wages-fund, and therefore ultimately to produce a fall in wages. The higher the rate of interest the greater is the inducement to save. fall in the rate of interest from 3 to 2 per cent. would cause many persons to expend their wealth in their own enjoyments rather than employ it productively as capital. A reward of £2 a year for every £100 which they abstain from spending would not be sufficient in a great many instances to induce persons to save. Hence, the supply of capital would be checked. On the other hand, there are

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many persons who would say, "We cannot live on the income yielded by 2 per cent. on our capital; as we cannot get more than this here we will invest in some foreign enterprise, in an Indian tea-garden, an American railway, or a Peruvian mine." A large amount of capital is consequently exported, whilst at the same time the accumulation of capital is checked by decreasing the inducement to save. Such circumstances would gradually produce a very great diminution in the capital of the country. Circulating capital always bears some proportion to the gross amount of capital. As previously explained in Section I., Capital is divided into Fixed Capital and Circulating Capital. If, therefore, the capital of a country is diminished, both these portions of it will in all probability be reduced. The principal employment of circulating capital is the maintenance of labourers; that is, paying the wages of labour. A decrease in the amount of circulating capital will therefore inevitably produce a decrease in the wages of labour. Hence, it is seen that any circumstance which materially reduces the rate of interest in a country checks the accumulation of capital, and leads to the export of capital. The capital of the country is thereby reduced, circulating capital is diminished, and wages fall.

If the rate of interest is unduly decreased by the demand of labourers for higher wages, the sufferings of the workingclasses when the consequent reduction of circulating capital takes place will probably be very acute. The increased wages which for a time they were able to secure would have stimulated a considerable increase of population. When, therefore, the reduction of wages takes place, the labourers find that their numbers have increased, and that their means of subsistence are diminished. Misfortune comes upon them like a two-edged sword that cuts both ways. The labouring population of the east end of London was a few years since suffering under this double calamity. The expenses which a working man necessarily incurs are much larger in London than in most places; house-rent and fuel are dear, and the rates are extremely high; the wages of labourers are therefore necessarily higher in London than in such a place as Glasgow. The consequence of this has been that one of