managed by an agent who is appointed by and works under the direction of the shareholders. A shareholder cannot bind the other shareholders by any contract except for necessaries required for the due working of the mine according to the usual custom of the district. The agent has no power to make the shareholders liable for money lent or upon bills of exchange. [M'Swinney, On Mines, London, 1884.]

J. E. C. M.

COST OF COLLECTION OF TAXES. One of the maxims or principles of taxation enunciated by Adam Smith, and which, as Mill observes, 'may be said to have become classical," is that "every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings to the public treasury of the state" (Wealth of Nations, bk. v. ch. ii. pt. ii.) Smith cites four ways in which a tax may offend against this principle. The cost of collection, he says, may be excessive; the regulations and procedure which a tax necessitates may be such as to obstruct, and even to divert, industry; it may, by holding out inducements to evasion, require the levy of penalties and forfeitures; and, finally, it may cause annoyance and vexation to the taxpayer from which he would gladly pay to be free. Fawcett adds a fifth ground of complaint under this head, viz. that the price to the consumer of a taxed commodity may be unduly enhanced, and that the dealer may be enabled to augment his profit thereby.

The scheme of taxation at present existing in the United Kingdom cannot be said, except in a few minor instances, to be open to objection on any of the grounds mentioned by Smith. Its revenue is collected at a low cost, amounting in the aggregate to little more than 3 per cent. of the amount collected; the supervision of the excise is practically restricted to breweries, distilleries, and tobacco manufactories, as to all of which it has been stated that the advantages arising from enforced regularity and accuracy fully balance any disadvantages ordinarily incidental to state supervision; the penalties and forfeitures recovered are inconsiderable, being £45,387 out of a total net revenue of £75,497,000, or 06 per cent; and lastly, the annoyance and vexation to the taxpayer is certainly not in excess of that which of necessity attends the collection of enforced contributions of every kind.

Dowell (History of Taxation and Taxes, 2nd ed., vol. ii. p. 529) describes the causes which have brought about this result. "The reform of the tariff, diminished smuggling, and the consequent reduction in the customs establishment and abolition of the preventive coast guard; an equalised spirit duty throughout the kingdom and diminished illicit distillation; the consolidation of the numerous revenue boards and establishments; the abolition of the taxes

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on manufactures; increased facilities of communication by railroad, letter post, and telegraph; the abolition of the pernicious system of appointments to offices through parliamentary influence; and improved education, higher intelligence, more sustained assiduity in business, and the use of ready explanation and willing courtesy-arts, perhaps, unknown before in taxgathering-by a permanent staff, growing in experience from precedent to precedent, and working under carefully formed instructions and, it may be added, eagle-eyed supervision from headquarters, have reduced the percentage by half in the sixty years."

The effect, on the cost of collection, of the limitation of the indirect taxes to a small number of commodities, aided doubtless by greatly reformed administration, is very marked. In 1775, when "heavy duties were already imposed upon many of the most important articles of consumption," and "almost all our most important manufactures were taxed,” the net revenue of the customs did not amount to more than two millions and a half, but it was levied at an expense of more than 10 per cent in salaries and other incidents, and more than 20 or 30 per cent if the perquisites at that time exacted by custom-house officers are taken into account (Wealth of Nations, bk. v. ch. ii. art. iv.) In 1816, "with everything taxed that could be taxed," the net amount received from customs duties cost more than 14 per cent to collect. In 1825 this rate had fallen to less than 8 per cent, in 1843 it was 5 per cent, and it is now about 4 per cent.

The earlier economists concluded, from the facts of which they were cognisant, that the cost attending the collection of taxes on commodities was much in excess of that of collecting direct taxes. The operation of the various causes above enumerated has, however, tended to equalise that cost, and the same tendency is observable in other countries. Thus in 1841 the cost of collecting the customs duties was 5.33 per cent, and in the case of excise 6:37 per cent as compared with 2.16 per cent for stamps, and 4.13 per cent for assessed taxes (Bohn's Cyclopædia of Political Knowledge, 1849, art.

""

Taxation"). In 1885 the cost of the customs had been reduced to 4.36 per cent, and that of the whole inland revenue (excise, stamps, and taxes) was 3.52 per cent. The cost of collecting direct taxes in France before the Revolution is stated (Roscher, Finanzwissenschaft, bk. iii. § 91) to have been 6 per cent as against 14 per cent in the case of indirect taxes, but in 1881 the duties on commodities cost only 5.13 per cent to collect, and the direct taxes 3.5 per cent. In Prussia the cost of the direct taxes rose from 4 per cent in 1861 to 7 per cent in 188384, whilst the cost of the indirect imposts fell during the same period from 12 to 9 per cent. In the United Kingdom it may be said that

e me sad zuse fine at 10 le na A EXA smetting vrEE & JAC 10 % 60Lt, a sun sarut will 11 per 15 We at 13 per sans for campe ins a The an SDA SKRETTEL that mudel sť the valea perkortet a vasettica with the viertuna jauh for vy the horri ja tartATER. w'un sa fran, sandy vajaat i en pucy BlossoVE mad grita for the prepantion of the woLIT

1 qtestun with the seara de . . in a masz parmes A was the amp die on dessa In the cand the day sea ere i uzetion *** eux exclage and dia emmersial txawtina, "Iyan un som devoire spor WALLETS, TV, und hier, the coat of wich exta regis. y extimated, but with in the we unatembe. The our d ramattan. A ua terma-tax a comparatively low try researm of the great came with which much di una revende under that head is obtained, The derivation of the tax from dividends paywhile out of the pobie funds and other similar incomes is a simple matter, and it may be taken that one-third of the tax costs less than 2 per cent to collect, which would bring up the cost of the remaining two-thirds of the tax to about the same point as in the case of the indirect tazes, viz. 4 per cent.

The small stamp duties on such documents as receipts and cheques are collected at an exceptionally low cost, whether the charges defrayed by the state or by the individual taxpayer be taken into consideration.

It remains to consider the ground of objection under this head against taxes on commodities, viz. that a dealer makes an additional profit by reason of their existence. Fawcett was of opinion (Manual of Political Economy, 5th ed., p. 554) that the retailer is able to obtain "the ordinary trade profit" on the amount of the duty, and assuming this profit to be 20 per cent, he estimated that the consumer would pay at least this amount more than the revenue would receive. This, he says, "is the most serious objection which can be urged against taxes on commodities," It may, however, be doubted whether this proposition is clearly established, the fact that the price of an article is augmented by the imposition of a tax will not of itself be sufficient to enable the trader to secure the same rate of prolit on the enhanced price as that which he would obtain on the price of the article

fer materal me if ideas The decessity for the purymes of sostreal A csectence of the native & Sealer being required to pay over the duty prior to the delivery of the emmotty de casingtion, has been very much refused by the estabJasmens of bonded warehouses a viltà articles can be stored without payment of dry m the time approaches when they are to be taken into eccemption. In the case of beer, wh is not permissed to be warehoused in brod, a limited amount of credit is given to the m facturer for the payment of the duty.

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The English customs system is remarkable for its vigorous adherence to the principle of parely financial duties" See Pro Bastable, Public Finance, London, 1592, bk. iv. ch. vii. $3.

The following table shows the actual gross receipt of duty by the inland revenue department, and the percentage of the cost of collection in the years specified :

66

But

COST OF PRODUCTION. The real cost of production of any commodity is held to be the sum of the efforts and abstinences" requisite to make it ready for consumption, and the act of production is not said to be completed until the commodity is in the hands of the consumer or until (as Mill phrases it) it has received the utility of being in the place where it is wanted. In a modern industrial society, with a complex system of division of labour and with raw material and other requisites of production drawn from all parts of the world, it is clear that in most cases the series of efforts of all kinds, taking into consideration those which are indirect as well as those which are direct, would be practically infinite. This difficulty, however, may be overcome as in other sciences by neglecting quantities below a certain magnitude. even after the mental elements in real cost have been reduced to a minimum in number in this way, it is found that the analysis cannot for most purposes, practical or scientific, be carried so far, and we must attempt to arrive at some common measure by which the summation may be effected and a comparison made. This leads to the position emphasised by Mill (bk. iii. ch. iv. § 1), "If we consider as the producer the capitalist who makes the advances, the word labour may be replaced by the word wages; what the produce costs to him is the wages which he has had to pay." After making allowance for the partial error concerning wages implied in the word "advances" (see WAGES; WAGES FUND), we arrive at the distinction which is expressed by the phrase "expenses of production" (adopted by Prof. Marshall in his Economics of Industry) as contrasted with the real cost in the sense defined above. That is to say, we are to consider only the money measures of these various efforts of labour, and it is left to the theory of wages and profits to explain how

437

the nominal or money expenses tend to become We assume then proportioned to the real cost. that in any industrial society there is at any time a certain general rate of wages which is necessary that labour may be forthcoming and a certain general rate of profits which is necessary for the creation and application of the requisite auxiliary and sustaining capital. The forces, whether "natural" or due to the "policy of Europe," to adopt Adam Smith's language, which are the efficient causes of variations in these rates, or which account for the actual rates at any time, are estimated in considering the distribution of the wealth of the society, and it only leads to confusion in considering cost as affecting value to repeat the analysis at the later stage. It may then be taken for granted that in any modern industrial society no article will continue to be produced which does not yield the wages and profits which will satisfy the labourers and capitalists concerned. It must be added, however, as is shown also in the theory of wages and profits, that there are various natural and artificial causes of difference in the returns in different employments even in "the same neighbourhood" (Adam Smith), and with what would now be termed perfect mobility of labour and capital. These causes of difference must be allowed for in addition to the general rates, and we may then assume that in any industrial society there are at any time determinate rates of wages and profits requisite to bring into play particular kinds of labour and capital.

At this point the fundamental law of cost (or rather expenses) of production may be thus stated:-The normal selling price of any article tends to be such as to yield the wages, interest, and profits involved in the expenses of production. If the price is above this rate, labour and capital are attracted to the industry, the supply is increased, and the price falls; whilst conversely, if the remuneration is not so high, labour and capital are repelled and the price rises. But it must be observed that in any established industry, owing to the want of perfect mobility of labour and capital, the effect of a fall in price due to a lessened demand for the product on the part of other industrial groups may be to cause a quasi-permanent fall in the rates of wages and profits in that industry; and thus lower for a considerable time the expenses of production (see WAGES). If, however, we assume that mobility is perfect, or allow time for the full effect of the forces which determine wages and profits, the normal expenses of production are given in the law as stated. The argument involved in this analysis will be found to coincide with the ideas implied in the popular usage of the phrase "cost of production. This is best seen from considering a new industry. maker of a new article will expect to obtain from the selling price a sufficient return to

The

attract the labour which he requires, and to give besides fair amount of profit. Otherwise he will not continue to make the article, whilst conversely, if the price is higher than this normal rate, the industry will rapidly spread until through competition the price falls.

We may now carry the analysis a step further and consider the causes of variation in the "cost price" of articles, to adopt a useful popular phrase. It must be assumed once for all that price will vary exactly with or exactly measure value, in other words that the causes of purely monetary variations may be neglected. It would be as absurd to repeat at this stage the theory of MONEY and PRICES (q.v.), as at an earlier stage to bring in the theory of wages and profits. To make the assumption quite clear, let it be supposed then that so far as the causes affecting the general level of prices are concerned, there would be no variation in the prices of particular articles.

With this hypothesis it will be seen that a rise in the general rate of wages, reckoned in money, will so far raise the normal price of the articles on which the labour is employed. It is not necessary here to inquire in detail how such a rise might take place; it might be at the expense of profits, or be caused by a lessened amount of unproductive consumption on the part of govern- | ments, municipalities, or individuals, or it might be due to increased cost of living caused by natural or artificial causes. It is sufficient to assume that a general rise occurs as described. There is in this case no necessity a priori for a corresponding rise in the rate of profit, and in fact that rate may decline. It follows, then, that so far the cost price of things made by the direct employment of labour will tend to rise relatively to those in the production of which there is much fixed capital and a longer time involved. Thus a general rise in wages may disturb relative prices, considered as dependent on cost of production. Similarly a rise in general profits would disturb relative prices, acting of course in an opposite direction. Conversely a fall in general wages or profits would also disturb prices mutatis mutandis.

It may next be noted that any change in the quantity of labour or capital employed will so far affect relative prices, as is best illustrated by the effects of the adoption of labour-saving machinery. Ricardo (and to some extent Mill) appears to lay too much stress on the quantity of labour, and in this way to fall into the paradox, true only under extreme hypothetical conditions, that movements in the general rate of wages cannot affect relative values.

Variations in the relative rates of wages and profits requisite for the normal support of any industry, naturally cause corresponding differences in the normal cost price. This is too obvious to require amplification.

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Besides labour and capital in the ordinary sense of the terms, raw material is required. This raw material, however, is itself the product of labour and capital, and so far would come under the analysis just given. But since Ricardo gave such prominence to the economic theory of rent, the text-books have emphasised the fact that raw material is more directly dependent upon natural sources of supply, and that these sources of supply may be exploited at unequal costs. This leads to the position

"

that when there is a difference in the cost of producing the various parts of the normal supply, the normal price must be such as to give a fair return to that portion produced under most unfavourable circumstances. If it falls below, the supply from that source would be discontinued until the price rises, whilst if the price is above this limit resort will be made to inferior sources until the "source on the margin again just determines the normal cost. If, however, the worst land or mine (or the like) just pays the expenses of working at the price, the better sources will give more than the ordinary return. This difference constitutes economic rent (see RENT). According to this view it is obvious that economic rent cannot enter into the cost of production, in other words, price determines rent not rent price.

Although economic rent, under the simple hypothetical conditions laid down in the theory, does not enter into cost price, the payment of rent under actual conditions may affect this price in several ways. The object of the land

owner is to obtain a maximum net return when the land is let, and it is possible that under a system of cultivating ownership more labour and capital would be devoted to land than it would pay the landowner to sanction in the case of a tenant. Many great improvements, for example, have been effected by English landowners with a very small return, and the consequent increase in the supply must have affected the price, whilst a farmer farming for profit and paying rent would have invested much less in the land. Peasant proprietors, again, notoriously cultivate their land beyond the point at which it would yield a rent, and the produce is consequently somewhat cheaper. On the other hand, the kind of produce may be determined partly by the convenience of the landlord (e.g. large grazing farms or deer forests as against arable or crofts), and the consequent effect on the supply operates on the price. If we consider the case of a new kind of produce introduced into a fully cultivated country, the grower would naturally consider the rent which he must pay for the necessary land as part of the cost of production. In some cases also there is in rent an element of monopoly, and in all cases it is difficult to separate purely economic rent from profit rent. This point has been pushed to an extreme by M. Leroy-Beaulieu in

his Répartition des Richesses, which is much criticised by Prof. Walker in his work Land and its Rent. On the whole it may be said that economic rent, if it can be actually separated from the other elements in cost according to the hypothesis assumed, does not enter into cost, but that practically other factors are closely combined with it to form rent in the popular acceptation of the term, and that, in this sense, rent often does form part of the cost (compare Prof. Marshall's Economics of Industry).

To complete the enumeration of the elements in cost of production, reference must be made to the effect of taxes (see TAXATION) and to the manner in which cost operates when combined with a complete or partial monopoly (see MONOPOLY).

The doctrine of comparative cost as determining the course of international trade and the limits of international values, originally enounced by Ricardo, and developed by J. S. Mill, Cairnes, and recently by Prof. Bastable, is properly treated under the headings named (see DIFFICULTY OF ATTAINMENT; INTERNATIONAL TRADE; VALUE). It may simply be noted here that in the statement of the theory cost is taken in the sense of real cost, as, owing to the absence of mobility of labour and capital between different countries, there is not the same correspondence between real cost and expenses as may be assumed in the same industrial area.

The most recent criticism of the generally accepted theory of cost of production described above, as embracing wages and profits, is the attempt of Prof. Walker to place profits on the same footing as economic rent, and thus to exclude it from cost of production in the same way as rent is excluded (see PROFIT).

[Cost of production forms such an important part of the general theory of Economics, that it is fully treated in all systematic works, and it is not necessary to refer to monographs on the question.]

COTTIERS. Under the Stuarts the clan system of joint occupation of land, based upon the customs of gavelkind and tanistry, was abolished in Ireland. In its place was introduced the English system of private ownership by landlords. The landlords let their lands to tenants at a rack-rent. But these tenants were not capitalist farmers, as in England, but labourers who cultivated a small holding by their own labour and that of their families. This system of peasant-tenants, or cottiers, has been extremely disastrous in its results. Owing to excessive competition for land-resulting from the absence of alternative occupations the tenants were in the habit of offering more rent than they could possibly pay, and thus

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scraped a miserable existence from the soil, while owing ever-increasing arrears to the landlord. In the early part of last century Swift records that "it is the usual practice of the Irish tenant rather than want land to offer more for a farm than he knoweth he can ever be able to pay and in that case he groweth desperate and payeth nothing at all." The inevitable result of the cottier tenure under these conditions-aggravated by absenteeism and the consequent presence of middlemenwas a distressed peasantry and a wretched system of agriculture. These evils have led in the present day to the Irish land acts of 1870 and 1881.

[Lecky, History of England in the Eighteenth Century, vol. p. 240 seq.-J. S. Mill, Political Economy, bk. ii.-J. E. Cairnes, Political Essays; Fragments on Ireland, essay iv.]

R. L.

COTTON FAMINE (1861-65). Some of the most serious economic disturbances of modern times arose out of the great civil war in the United States, occurring between 1861 and 1865. Amongst these, the most prominent, so far as its influence upon the interests of the United Kingdom is concerned, was the almost complete extinction for four years of the chief source of supply of cotton, the raw material of the largest textile industry of this country. In the month of July 1861 the United States government established a blockade of the southern ports, and, from that time the American cotton field was practically closed for four years. Fortunately the crop of 1860-61, the largest ever grown up to that time, had already been shipped, and stocks in the consuming countries had been abundantly replenished. The existence of these stocks, and the doubts, then widely entertained, of a long continuance of the war, kept prices of cotton comparatively low until nearly the end of 1861. With the opening of 1862, however, a period of scarcity and abnormally high prices began, which has been fitly named the "cotton famine." The immediate and most striking commercial results of the famine were the gradual establishment of new and extended sources of cotton supply, and the diminished use of cotton fabrics, accompanied by an enlarged consumption of woollen and linen goods. At the same time an industrial disturbance was occasioned in Lancashire, Cheshire, Derbyshire, and in the neighbourhood of Glasgow, which stands out very prominently in the history of those years.

An excellent and very full record of the painful consequences of the famine upon the manufacturing population, and of the measures taken to mitigate them, is given in Dr. Watt's Facts of the Cotton Famine. Its direct commercial effects upon the cotton trade are stated in a paper read before the Manchester Statistical Society in April 1869, by Mr. Elijah Helm, and entitled "A Review of the Cotton