The functions [pg 014] of capital are explained in general; the separation of fixed from circulating capital is made; and he discusses the influence of capital on the distribution of productive and unproductive labor; the accumulation of capital, money, paper money, and interest. He, therefore, gets a connected set of ideas on production, distribution, and exchange. On questions of production not much advance has been made since his day; and his rules of taxation are now classic. He attacked vigorously the balance-of-trade theory, and the unnatural diversion of industry in England by prohibitions, bounties, and the arbitrary colonial system. In brief, he held that a plan for the regulation of industry by the Government was indefensible, and that to direct private persons how to employ their capital was either hurtful or useless. He taught that a country will be more prosperous if its neighbors are prosperous, and that nations have no interest in injuring each other. It was, however, but human that his work should have been somewhat defective.29 A new period in the history of political [pg 015] economy, however, begins with Adam Smith. As Roscher says, he stands in the center of economic history.

New writers now appear who add gradually stone after stone to the good foundation already laid, and raise the edifice to fairer proportions. The first considerable addition comes from a contribution by a country clergyman, Thomas Robert Malthus,30 in his “Essay on the Principles of Population” (1798). Against the view of Pitt that “the man who had a large family was a benefactor to his country,” Malthus argued conclusively that “a perfectly happy and virtuous community, by physical law, is constrained to increase very rapidly.... By nature human food increases in a slow arithmetical ratio; man himself increases in a quick geometrical ratio, unless want and vice stop him.” In his second edition (1803), besides the positive check of vice and want, he gave more importance to the negative check of “self-restraint, moral and prudential.” The whole theory was crudely stated at first; and it raised the cry that such a doctrine was inconsistent with the belief in a benevolent Creator. In its essence, the law of population is simply that a tendency and ability exist in mankind to increase its numbers faster than subsistence, and that this result actually will happen unless checks retard it, or new means of getting subsistence [pg 016] arise. If an undue increase of population led to vice and misery, in Malthus's theory, he certainly is not to be charged with unchristian feelings if he urged a self-restraint by which that evil result should be avoided. Malthus's doctrines excited great discussion: Godwin says that by 1820 thirty or forty answers to the essay had been written; and they have continued to appear. The chief contributions have been by A. H. Everett, “New Ideas on Population” (1823), who believed that an increase of numbers increased productive power; by M. T. Sadler, “Law of Population” (1830), who taught that human fertility varied inversely with numbers, falling off with density of population; by Sir Archibald Alison, “Principles of Population” (1840), who reasoned inductively that the material improvement of the human race is a proof that man can produce more than he consumes, or that in the progress of society preventive checks necessarily arise; by W. R. Greg, “Enigmas of Life” (1873); and by Herbert Spencer, “Westminster Review” (April, 1852), and “Principles of Biology,” (part vi, ch. xii and xiii), who worked out a physiological check, in that with a mental development out of lower stages there comes an increased demand upon the nervous energy which causes a diminution of fertility. Since Darwin's studies it has been very generally admitted that it is the innate tendency of all organic life to increase until numbers press upon the limit of food-production; not that population has always done so in every country.31 Malthus's teachings resulted in the modern poor-house system, beginning with 1834 in England, and they corrected some of the abuses of indiscriminate charity.

While Adam Smith had formulated very correctly the laws of production, in his way Malthus was adding to the [pg 017] means by which a better knowledge of the principles of distribution was to be obtained; and the next advance, owing to the sharp discussions of the time on the corn laws, was, by a natural progress, to the law of diminishing returns and rent. An independent discovery of the law of rent is to be assigned to no less than four persons,32 but for the full perception of its truth and its connection with other principles of political economy the credit has been rightly given to David Ricardo,33 next to Adam Smith without question the greatest economist of the English school. Curiously enough, although Adam Smith was immersed in abstract speculations, his “homely sagacity” led him to the most practical results; but while Ricardo was an experienced and successful man of business, he it was, above all others, who established the abstract political economy, in the sense of a body of scientific laws to which concrete phenomena, in spite of temporary inconsistencies, must in the end conform. His work, therefore, supplemented that of Adam Smith; and there are very few doctrines fully worked out to-day of which hints have not been found in Ricardo's wonderfully compact statements. [pg 018] With no graces of exposition, his writings seem dry, but are notwithstanding mines of valuable suggestions.

In the field of distribution and exchange Ricardo made great additions. Malthus and West had shown that rent was not an element in cost of production; but both Malthus and Ricardo seemed to have been familiar with the doctrine of rent long before the former published his book. Ricardo, however, saw into its connection with other parts of a system of distribution.34 The Malthusian doctrine of a pressure of population on subsistence naturally forced a recognition of the law of diminishing returns from land;35 then as soon as different qualities of land were simultaneously cultivated, the best necessarily gave larger returns than the poorest; and the idea that the payment of rent was made for a superior instrument, and in proportion to its superiority over the poorest instrument which society found necessary to use, resulted in the law of rent. Ricardo, moreover, carried out this principle as it affected wages, profits, values, and the fall of profits; but did not give sufficient importance to the operation of forces in the form of improvements acting in opposition to the tendency toward lessened returns.