JOHN RAE ON ECONOMIC DEVELOPMENT: A NOTE Downloaded from https://academic.oup.com/qje/article/73/3/393/1873379 by guest on 27 September 2021 By JOSEPH J. SPENGLER

Introduction, 393. — I. Rae's theory, 395. — II. Application of Rae's theory, 402. — III. Conclusion, 405.

"He formulated the economic theory of new countries. . ." —R. Warren James'

What the historian of thought discovers in a work is determined largely by the questions he brings to its study. Similarly, what the analyst of a treatise notices is governed principally by his interests of the moment. It is not surprising, therefore, that assessments and interpretations of the writings of economists of an earlier era undergo modification as the Weltanschauung and the concerns of economists change with the ascent of new problems and the recession of old ones. A case in point is the work of that remarkable Scotch-Canadian, John Rae. Possibly as brilliant an economist as nineteenth century North America was to produce, his ideas, conceived and formulated in "the solitude . . . of the Canadian backwoods" and supported by homely illustrations drawn from the frontier, have continued to influence economists for more than a century.' Thus Nassau Senior, impressed by Rae's account of "the accumulation of capital," recom- mended his book to Mill who, greatly influenced by it, cited it in his discussions of the division of labor, the disposition to save, indirect taxation, and protectionism.' American commentators drew on 1. See R. Warren James, "The Life and Work of John Rae," Canadian Journal of and Political Science, XVII (1951), 142. 2. This work, Statement of Some New Principles on the Subject of , Exposing the Fallacies of the System of Free Trade and of Some Other Doctrines Maintained in the "Wealth of Nations" (Boston, 1834), was edited and reissued by Charles W. Mixter as The Sociological Theory of Capital (New York, 1905). Mixter included an acconut of Rae's life which has been supplemented by James (see op. cit.) who is preparing an edition of Rae's writings, together with a full account of his life and intellectual achievements. James mentions a doctoral dissertation on Rae's work (Helmut Lehmann's John Raes Werk, seine philosophischen and methodologischen Grundlagen, Dresden, 1937), in which Rae's inductive approach and F. Bacon's influence on Rae are treated. Rae was born in , Scotland, in 1796, studied medicine and social and other sciences, came to Canada in 1822, went to California in 1849, lived in Hawaii 1850-70, and then returned to New York where he died in 1872. 3. See J. S. Mill, Principles of Political Economy, Ashley ed., pp. 97, 129 n., 165-72, 870 n., 922; James, op. cit., pp. 155-56; unsigned, "John Rae and : A Correspondence," Economica, X (1943), 254. See also Mixter, 393 394 QUARTERLY JOURNAL OF ECONOMICS

Rae's protectionism and his view of cost-reducing invention; 4 W. E. Hearn seems to have been inspired by his general approach ; 5 Thor- stein Veblen, by his analysis of ;6 and various interest theorists, by his treatment of capital.? F. W. Taussig must have Downloaded from https://academic.oup.com/qje/article/73/3/393/1873379 by guest on 27 September 2021 been influenced by Rae's theory of invention. 8 This note has to do solely with a branch of economic theory that forms the core of Rae's work just as it forms the core of the very work that Rae believed himself to be criticizing, namely, Smith's Wealth of Nations. The branch of theory in question is that relating to economic development. Rae's theory will be summarized in Section I; his application of this theory will be examined in Section II. "Letters of Rae . . . to Mill on the Malthusian Doctrine of Population," Economic Journal, XII (1902), 111-20, and Sociological Theory of Capital, p. xxxii. Mill's praise of Rae's work led to its translation into Italian by F. Ferrara and its inclu- sion in his Biblioteca dell Economisti, 1st series, XI (Turin, 1856). W. Roscher referred to Rae's views on saving and economizing on tools. See Principles of Political Economy, trans. J. J. Lalor (New York, 1878), Book I, secs. 45, 59. 4. See Joseph Dorfman, The Economic Mind in American Civilization, II (New York, 1946), 779-89, 795, 835, 838, 940, and p. xiv of "bibliographic notes." See also ibid., III (New York, 1949), 422, where it is said that as late as 1909 the theory of capital formation had not been advanced much beyond Rae's. 5. Mixter believes Hearn, in his Plutology (1864), indebted to Rae for "method and spirit." See Sociological Theory of Capital, p. xxxii. Hearn wrote this book after removing to Australia; he referred once (op. cit., p. 154) to Rae, but often to Mill. 6. Veblen knew Rae's work but did not cite it. 7. E.g., see E. von BOhm-Bawerk, Geschichte und Kritik der Kapital- zinstheorien (Innsbruck, 1900), pp. 375-428; , unsigned note, "A Neglected Economist," Yale Review, V (1896-97), 457, and The Theory of Interest (New Ygrk, 1930), passim, which was dedicated to BOhm-Bawerk and Rae; Gustav Akerman, Realkapital und Kapitalzins (Stockholm, 1923), whose views, partly inspired by Rae, were assessed by K. Wicksell (see appendix to Lectures on Political Economy, I (London, 1934), 259-61). Mixter, who had originally looked upon Rae as "A Forerunner of BOhm-Bawerk" (this Journal, XI (1896- 97), 161 ff.), later described Rae's theory of capital as more complete than Bohm-Bawerk's because it took invention into account ("Bohm-Bawerk on Rae," ibid., XVI (1901-2), 385 ff.). 8. See "Capital, Interest, and Diminishing Returns," this Journal, XXII (1907-8), 333-63, esp. 355 ff., 362 ff., also Principles of Economics (New York, 1939), p. 32, where the rate of interest is said to depend "on a race between improvement and accumulation." Taussig does not refer to Rae, but knew the latter's work well, having directed Mixter's attention to it. See Sociological Theory of Capital, p. xvii. Taussig's 1908 paper may be looked upon as a chapter in a long-continued controversy between J. B. Clark, F. H. Knight, and others, on the one hand, and those who, on the other, supposed the marginal productivity of capital to fall rapidly in the absence of invention. See my "Economic Opinion and the Future of the Interest Rate," Southern Economic Journal, III (1936), pp. 19-22. JOHN RAE ON ECONOMIC DEVELOPMENT 395

I Economic development, Rae argues in his main Book II, depends upon capital accumulation and upon the extent to which man aug- ments his store of technological knowledge and transforms this knowl- Downloaded from https://academic.oup.com/qje/article/73/3/393/1873379 by guest on 27 September 2021 edge into improvements and inventions.' It thus depends upon the degree to which man gives expression to the "inventive principle" and to the "accumulative principle" ; for the latter prompts man to avoid waste, save at ever lower rates of interest, and form capital, whereas the former enables man to overcome the tendency of returns to capital to fall as the stock of capital increases.' Rae says little of that division of labor which, in Smith's work, served, along with capital accumulation, to give rise to economic development. Rae looked upon the division of labor as primarily a result or concomitant rather than as a cause of invention and the growth of intelligence, though he noted that it made possible a fuller use of tools and hence a higher return on capital.' Nor did Rae stress population growth which, in Smith's system, became a source of the division of labor.' 9. According to E. Cannan, J. S. Mill was the first to note the importance of accumulation of knowledge and progress in the industrial arts. His predeces- sors had not included technical progress among the highly significant sources of the "productiveness of labour." See Cannan, A Review of Economic Theory (London, 1930), pp. 122-24. Cannan seems not to have known Rae's work at first hand. It is quite possible that Rae's work led Mill to appreciate the impor- tance of a community's "skill and knowledge" and its inventiveness (op.cit., pp. 107-9). Mill's appreciation was not shared by his successors, Cannan reports. Mill himself questioned whether mechanical invention had lightened the worker's toil, or could do so, if numbers remained uncontrolled (ibid., p. 751). How- ever, Hearn (op. cit., Chaps. 4, 10-11) devoted three chapters to invention and education. 1. See summary Chap. 14 in Book II of New Principles. My references, unless otherwise indicated, are to this edition rather than to Mixter's rearrange- ment of chapters in his edition, entitled The Sociological Theory of Capital. For the purposes of the present discussion the organization of the first edition is superior to Mixter's. A guide to the original is provided, however, on pp. 484-85 of Mixter's edition. 2. New Principles, pp. 165, 352 1f., 356-57. Cannan accredits Rae with having been the first to state that the divipion of labor makes for economy in the use of tools; he cites the quotation from Rae's work used by J. S. Mill to make this point. See Cannan, op. cit., p. 97. Mill who, following E. G. Wakefield, wrote of the co-operation rather than of the division of labor, did not attach so much importance to the division of labor as the source of invention as had Smith (op. cit., p. 128). 3. In the New Principles Rae took it for granted that numbers "are kept up to the quantity of materials fit for their subsistence which it affords them" (ibid., p. 96, also pp. 30-31), but he supposed that the standard of life might be higher or lower (ibid., pp. 96-97, 323-25). Eventually, however, as a result of his study of depopulation in the Sandwich Islands, Rae rejected Malthus' explan- ation and introduced the concept of an "effective desire for offspring" (a com- panion to his "effective desire of accumulation") which made numbers depend 396 QUARTERLY JOURNAL OF ECONOMICS

Rae's Book II is reducible to three principles, according to the first of which the return to capital diminishes slowly but continu- ously under static conditions and in the absence of new accretions of relevant knowledge and their incorporation in inventions. Having defined the "capacity" of man-made, want-satisfying "instruments" Downloaded from https://academic.oup.com/qje/article/73/3/393/1873379 by guest on 27 September 2021 as "their power to produce . . . events equivalent to a certain amount of labor," Rae devised a means of ordering these instruments in terms of their capacity to yield returns over costs per time period.' This means, though described by Rae in largely verbal terms, may be reconverted into the quantitative terms he must originally have used when formulating his ideas. Let e = y/c where e stands for efficiency, y for the returns yielded by an instrument during the interval separating its initial formation and its exhaustion, and c for the instrument's initial cost. 5 Furthermore, let (1 r)n = k, where r stands for rate of return above cost and on cost yielded annually by an instrument; lc = e = 2; and n stands for the order of an instrument, or the number of years required by it to yield double its cost. Then, if r = 100 per cent, n = 1, and the instru- ment is of order A; if r approximates 41 per cent, n = 2, and the instrument is of order B; if r approximates 5 per cent, n = 14, and the instrument is of order N; and so on. Every instrument falls into an order, or in between two orders. 6 Furthermore, as capital accumu- upon socio-psychological conditions present within a society as well as upon material conditions external to a population. See Mixter, Sociological Theory of Capital, pp. 354-58; also "Letters of Rae. . .", loc. cit. That the desire for savings may run counter to the desire for offspring is not gone into. 4. New Principles, Book II, Chap. 4, esp. p. 100. Agricultural land also is defined as an "instrument," though, unlike other.instruments, it (together with certain improvements in it) is not subject to "exhaustion," or physical deprecia- tion and depletion. Ibid., pp. 100, 107-8; also p. 86 where instrument is defined as any "arrangement" of matter suited to achieve some end. 5. Labor, or a day's wages, is employed as the numeraire in terms of which both the cost of an instrument and the returns yielded by it may be represented. Ibid., pp. 91-92; also p. 98 where, after describing "a day's labor as the unit, serving as the base for calculations, concerning the formation and exhaustion of the capacity of instruments," and then finally converting this unit into a day's "wages," Rae points out that such a numeraire is not applicable when inter- national comparisons are under consideration. 6. Ibid., pp. 100-106,194-95. "To simplify the consideration of the matter, we may, for a little, proceed on the supposition, that every instrument is con- structed at one precise point of time, and exhausted at another. In that case, every instrument would find a place, in some part of a series, of which the orders were determined by the period of time at which instruments placed in them, issue, or would issue, if not before exhausted, in events equivalent to double the labor expended in forming them. These orders may be represented by the letters A, B, C, " Z, a, b, c, c." Ibid., pp. 100-101. An instrument in order A yields double its cost in one year; an instrument in order B, does so in two JOHN RAE ON ECONOMIC DEVELOPMENT 397 lates, it must, in the absence of new inventions, yield an ever lower return, that is, assume forms ever deeper in this alphabetical series — forms which belong, not to "the more quickly returning orders," but to "the more slowly returning orders." 7 For, if an instrument's durability is increased, its efficiency e tends to remain unchanged Downloaded from https://academic.oup.com/qje/article/73/3/393/1873379 by guest on 27 September 2021 (with costs c and returns y each growing at about the same rate), and, consequently, the value of its n coefficient rises. Even though, given an instrument's durability, existing knowledge can be used to increase its efficiency e and reduce the value of its n coefficient, such extension must presently encounter rising marginal material costs c, with the result that efficiency and return (i.e., e and r) decline.' One could infer, from the rate of interest obtaining in a country, "the order in our series, at which instruments are there arrived," since the rate of interest constituted a "fair measure of the real average rate of profits, in any country."' One could infer also, and find support in the experience of new and capital-short countries, that in such countries "stock" must be kept employed fully and in "the more quickly returning orders."' Although Rae believed that, "while art itself remained sta- tionary," the "formation of instruments," would "gradually carry instruments to more and more slowly returning orders," he did not suppose that this decline need proceed rapidly, and he took it for granted that vast amounts of capital could be utilized, should it continue to be forthcoming at low rates of return.' He was not a stagnationist. Nor did he make use of a stationary state, conceived years; one in Z, in twenty-six years; and so on. Instruments, whose point of exhaustion fell short of or lay beyond the point in time at which their return was double that of their costs, were reduced to terms of instruments for which these points coincided. See ibid., pp. 102-3. 7. Ibid., pp. 109, 117, 118-19, 195-96. 8. Ibid., pp. 110-14. Rae does not use the term marginal, though it is apparent that, reasoning as had Ricardo, he supposes Ay / tic to become a declin- ing quantity. "Neither" durability nor efficiency "can be indefinitely increased, without carrying the instruments constructed continually on, to orders of slower return." Ibid., pp. 113-14. The tendency of returns to decline is less pro- nounced when a given outlay on an instrument simultaneously increases its durability and efficiency, or when materials are numerous and varied and oppor- tunities for substitution and combination are great. Ibid., pp. 114-15. 9. Ibid., pp. 195-96. A high rate might, of course, reflect either a low rate of accumulation in the past, or a great amount of invention. Ibid., pp. 262, 322. 1. Ibid., p. 207. Nonsavers who migrated to new countries often became savers in these countries because there the interest rate was high enough to evoke savings (p. 199). 2. Ibid., pp. 115-17. It was impossible to fix "any limit" to "the forma- tion of instruments" in a community "where art has made considerable advance." Ibid., p. 117. 398 QUARTERLY JOURNAL OF ECONOMICS

of as either an analytical tool, or a possible end result, even though such a result was possible on his premises. According to Rae's second principle, capital accumulation varied not only with the rate of return to be had, 3 but also with a people's "effective desire of accumulation," with its "determination to sac- Downloaded from https://academic.oup.com/qje/article/73/3/393/1873379 by guest on 27 September 2021 rifice a certain amount of present good, to obtain another greater amount of good, at some future period," with its ability to perceive the importance of future wants and make provision for them. 4 The more powerful this desire, the "more slowly returning" was the order of instruments which an individual or a society stood will- ing to construct. 5 Accordingly, the more numerous and the more powerful were the accumulation-favoring elements and motives present in a society, the higher would be its rate of capital forma- tion.' Thus, since uncertainty caused man to favor the present over the future, whatever reduced uncertainty (e.g., peace, security, increase of life expectancy) strengthened his desire to provide for the future. And since man as an individual preferred the present to the future even when both were certain, whatever bound man more closely to society and to his fellows (e g , family ties, "social and benevolent affections," intellectual power to perceive and reflect upon the future) increased his "effective desire of accumulation."' The desire to accumulate would seem then to derive strength, chiefly from three circumstances. 1. The prevalence throughout the society, of the social and benevolent affections, or, of that principle, which, under whatever name it be known, leads us to derive happiness, from the good we communicate to others. 2. The extent of the intellectual powers, and the consequent prevalence of habits of reflection, and prudence, in the minds of members of the society. 3. The stability of the condition of the affairs of the society, and the reign of law and order throughout it. 8

3. E.g., see ibid., p. 199, where Rae describes how migrants who had not saved at home begin to save upon moving into countries in which the rate of return to capital is higher. 4. Ibid., p. 119, also pp. 81-83, 87, 89, 322-23. 5. Ibid., pp. 117, 119, 162, 199; also p. 205 where continuing formation of instruments is made dependent on realization of "anticipated returns." 6. He apparently supposed other conditions to be given, since he listed three additional factors which conduced to capital formation by increasing the ratio of capital's return to its cost. These factors are: the "quantity and quality of materials owned" by a society; "progress of the inventive faculty"; and a "lowering in the rate of wages" when it is in excess of the required minimum. Of these three forces, the "advance of invention" was by far the most powerful and unbounded. Ibid., pp. 109, 130-31, 362. Multiplicity of materials was important in that it increased man's range of alternatives (ibid., p. 115). 7. Ibid., pp. 119-25, 128-29. The importance of length of life expected is noted several times (ibid., pp. 119, 123, 155). 8. Ibid., p. 124, also p. 362. See also pp. 275-76, 279, where these circum- stances are described as unfavorable to vanity and luxury. JOHN RAE ON ECONOMIC DEVELOPMENT 399

Where opposing circumstances prevailed, the desire to accumulate was weak. For various reasons, among them some that we should label "cultural," societies differed greatly in respect of strength of desire to save: Thus American-Indian hunting tribes were very little disposed to save; Chinese were more disposed to save than were other Asians Downloaded from https://academic.oup.com/qje/article/73/3/393/1873379 by guest on 27 September 2021 but less so than Europeans who in turn were somewhat less thrifty than North Americans Because agriculturalists were relatively inclined to save, capital formation had been fostered by the advent of settled agriculture.' Furthermore, consumption habits varied. Vanity, "the mere desire of superiority over others," together with the luxury to which it gave rise, everywhere retarded capital accumu- lation, but with more force in some countries and regions and classes than in others.' The third of what I have called Rae's three principles amounts to the statement that, in the longer run, it is upon the cumulation of relevant knowledge and its expression in invention that both capital accumulation and the improvement of man's lot ultimately depend. For, in the absence of invention, rising costs and delay in receipt of return cause the return on capital to fall as capital accumu- lates, until finally capital formation proceeds so slowly, even in countries in which the "effective desire of accumulation" is strong, that it contributes little to the improvement of a society's situation.' Normally, however, even though some conditions which conduced to invention were unfavorable to accumulation,' Rae believed that

9. On the dispositions of various peoples to save see ibid., pp. 131-42, 147-53, 155-56, 206-7, 239, 278. Individuals and working classes also differed in this respect (ibid., pp. 203-4). 1. Chap. 11 in Book II has to do with "luxury," its genesis, and its effects. See ibid., esp. pp. 265, 266, 268, 271, 283, 285, 290, 292, 311-12, 318. Sometimes vanity encouraged invention which in turn sometimes removed goods from the luxury category by making them common or useful. Ibid., pp. 291-92. Industry and frugality tended to flourish in new countries where, because the population was scattered, vanity could be given little play. "There is hence no better school for the dissolute European than the backwoods." Ibid., pp. 280-81. Rae was not concerned about the possibility of oversaving, since he subscribed to Say's law. Ibid., pp. 203, 310-11. 2. Ibid., pp. 22-24, 113-14, 117, 322. See also p. 31 where invention is described as the "cause of the existence" of capital and population; p. 23 where invention rather than parsimony is said to be the cause of capital accumulation; and p. 264 where it is said that "accumulation of stock diminishes profits" whereas "augmentation of stock" through invention "increases profits." See also p. 13 where it is said that as a nation's capital increases, its composition and quality change. 3. "Intestine commotions, persecutions, wars," etc., either "altogether destroy, or, at least, very much impair the strength of the effective desire of accumulation. On the contrary, they excite the inventive faculty to activity"; for they undermine "the excessive propensity to imitation" and the disposition 400 QUARTERLY JOURNAL OF ECONOMICS many conditions making for capital accumulation were favorable also to invention, among them "a preponderance of the social and benevolent affections," the presence of "reflective men," etc.; that strength of the accumulative principle and strength of the inventive principle tended to co-exist; and that what increased the power of Downloaded from https://academic.oup.com/qje/article/73/3/393/1873379 by guest on 27 September 2021 the one principle tended to increase that of the other.' Moreover, invention augmented capital accumulation by pushing up the rate of return on capital and causing individuals with a given "effective desire of accumulation" to save more; by increasing output; and by making available new productive objects of desire (e.g., a thresher) whose purchase generally entailed prior and additional saving on the part of would-be purchasers.' Rae's account suggests that the rate of invention tended to be relatively high when inventors were treated well, when the propensity to imitate was weak, and when arts and materials were numerous and diverse. By way of illustration he pointed to the history of the plough, of sacred architecture, of the water mill, of the steam engine, and of printing and banking B As a rule, Rae (himself an inventor) remarked, inventors, though they served all of mankind, were mis- understood, badly treated, and ill-rewarded; it was desirable that their efforts be better compensated.' "Servile imitation," the "anta- gonist" of "change," being the principal immaterial obstacle to of men to be "so much given to learning, that they do not readily become dis- coverers." "Whatever, therefore, breaks the wonted order of events, and exposes the necessity, or the possibility, of connecting them by some other means, strongly stimulates invention." "Unexpected exigence" rouses "slumbering faculties." The "palsy of the mind" is undone by "revolutions" and "great changes." Ibid., pp. 222-23; see also pp. 233, 235, 316-19. 4. Ibid., pp. 212, 222, 244; also p. 239 where "the strength of the effective desire of accumulation" is said to have facilitated the passage of various arts into Europe despite the presence of such obstacles as relatively high wages and "stub- born materials." See also ibid., pp. 263, 322. "Were the operation of the prin- ciples of invention and accumulation to go on unchecked, the amount of stock of all nations would be gradually and uninterruptedly increased; the one furnish- ing the means of providing additional supplies for the wants of futurity, the other giving the motives to make the provision." Ibid., p. 265. 5. Ibid., pp. 20, 29-30, 259, 261-63, 321-22. See also ibid., p. 15, where he says that only invention can "create." 6. Ibid., pp. 224-50, on the history of invention. 7. On this last point Rae cited Francis Bacon, on whose comments on invention and induction he often drew. Ibid., p. 216, also pp. 210, 214, 216-17, 219, 222. Rae distinguished sharply between "real inventors" and "mere trans- mitters of things already known." He described the latter as a "very useful class," but considered their role very inferior to that of inventors, since the latter had to perceive what others could not perceive and, when they made dis- coveries, had to oppose and "direct the current." It was the inventors, there- fore, who brought "visibly before us forms previously hidden" and changed the material world. Ibid., pp. 208, 213-14. JOHN RAE ON ECONOMIC DEVELOPMENT 401 invention, its progress was favored by whatever weakened man's propensity to imitate and dissuaded him from preferring exclusively that which he had always known.' Among the circumstances which tended to weaken this propensity he mentioned serious challenges to a people's material welfare (e.g., exhaustion of materials, rising Downloaded from https://academic.oup.com/qje/article/73/3/393/1873379 by guest on 27 September 2021 costs), the movement of tools or migrants from one region or country to another, internal disturbances or war, the mingling of peoples with diverse arts and of various cultures, and termination of exclusive dependence on agriculture.' Invention tended to flourish when arts were numerous and diverse, because invention often consisted in combining a number of arts and because the intermixture of arts dissipated imitation and gave rise to a kind of cultural heterosis.' Similarly, a diversity of materials, by providing men with an oppor- tunity to try out new substances and combinations, encouraged invention.' Unlike early twentieth century writers, Rae did not believe invention itself to be subject to diminishing returns. While the strength of the inventive principle varied from country to country, the role of knowledge was very great, and the force of invention was subject to little or no limit in the long run. "The advance of inven- tion" is a "quantity to the increase of which we can set no bounds." "It is impossible to put any bounds" to the operations of "art." "There are no limits to the inventive faculty."' On several occasions he suggested that invention might progress at an increasing rate, after arts and materials had become sufficiently numerous and diverse. 4 Rae was optimistic, therefore, respecting future prospects. "Even the barren deserts of Africa may, in after ages, be fertilized."

8. Ibid., pp. 209, 224-25, 236, 321. 9. Ibid., pp. 224-25, 229, 233, 237-39, 245-46, 251, 255. Of great historical importance was the migration of skilled refugees from religious or political per- secution. Ibid., pp. 118-19. 1. Ibid., pp. 225, 237-38, 243. 2. Ibid., pp. 115, 224. Earlier (Book II, Chap. 5, esp. pp. 109, 116-17) he had said that, even when knowledge remained stationary, if materials were sufficiently numerous and a people had acquired "considerable knowledge of the qualities and powers of the materials" they possessed, returns to instruments would not fall very fast as capital accumulated. For there would then be great scope for substituting materials for one another, for exploiting opportunities, and for improvements in one branch of the economy to stimulate improvement in other branches. 3. Ibid., pp. 131, 258, 304, also pp. 55-56, 99, 156; also p. 237 where he speaks of a conditional "continual onward progress." 4. "The productions of the union of arts also propagating others, like all generators, their increase goes on, . . . when there are no retarding checks, not in a simple arithmetical, but in a geometrical progression." Ibid., p. 245, also p. 115. 402 QUARTERLY JOURNAL OF ECONOMICS

Yet, judging from his historical account of inventions, he did not soon expect invention to increase at a very rapid rate, though he supposed its progress would be continuous.' Because of his con- fidence in invention, Rae believed that both wages and profits might remain high.' Downloaded from https://academic.oup.com/qje/article/73/3/393/1873379 by guest on 27 September 2021

II Rae's discussion of economic policy, though present in Book I as well as in Book III, was based upon the principles which he devel- oped in Book II. These have been described in the preceding sec- tion. An admirer of Francis Bacon whom he frequently cited, Rae believed his principles had been arrived at inductively whereas Smith's principles, against some of which he protested, had been drawn from a philosophical system. Smith's "great work" was intended "to explain known phenomena"; it was not to be considered "an inductive inquiry, leading to the discovery of the real laws determining the succession of those phenomena."' Smith's economic precepts did not therefore always fit the requirements of a new coun- try. Thus Rae, believing the relations obtaining between Canada and the rest of the British Empire to be mutually beneficial, rejected the view "that the sooner the connection between them is dissolved the better."' Rae, believing that disparity between "individual and national interests" might be great and taking for granted that the legislator 5. Ibid., pp. 224-30. In one place (ibid., pp. 30-31), however, he com- mented on the "great productive power of both the population and capital of a country," which, "when room is afforded them to shoot, seems so easily to fill any gap which is made in the national members or stock." He referred to the rapidity with which losses occasioned by great calamities (e.g., war, the fire of London) were made up. But he went on to indicate obstacles to the growth of numbers and capital which could in the end be removed only through invention (ibid., p. 31). Elsewhere (ibid., p. 14) he considered high what we should proba- bly consider a relatively low rate of capital growth: "Within a few centuries the national capital of Great Britain has increased ten fold." 6. Ibid., pp. 263-64. He did not believe that high profits necessarily entailed high prices, since high profits usually were consequent upon invention which served to reduce prices (ibid., p. 263). 7. On Smith see ibid., Book II, Chap. 15, esp. pp. lvi, 332-36, 342, 350-51; and on Rae's approach, ibid., preface and pp. 5-6, 413-14. Rae himself was an experimentalist and a student of natural history, geology, etc., at the time he was formulating some of his economic ideas, and he remained a careful observer and analyst of social phenomena throughout his life. See James's interesting account, op. cit. Rae is mistaken, of course, in saying Smith was not much of an empiricist. 8. Ibid., p. 5. Smith had held that, under certain conditions, the American colonies would be better off free. Rae's promised work on these mutual benefits never was printed. See Mixter, Sociological Theory of Capital, p. xxx. JOHN RAE ON ECONOMIC DEVELOPMENT 403 was a part of society and an instrument of nature and its processes, indicated that a large amount of state interference in economic life might be called for, above all in new countries. This interference would have economic development as its primary objective.' One could not always count upon self-interest to conduce to enough sav- Downloaded from https://academic.oup.com/qje/article/73/3/393/1873379 by guest on 27 September 2021 ing, or otherwise to promote economic growth adequately.' Private individuals, though well-intentioned, often were unable, or unable compatibly with their own interests, to accomplish, without assist- ance at the hands of the state, objectives that were to the advantage of the community.' A people might lack materials, requisite talents, sufficiently strong accumulative and inventive principles, industries to which its economy was potentially adapted, etc. At the same time it might be possible, through state intervention, to overcome these lackings even though unassisted private individuals could not surmount them.' Among the actions open to the state Rae included such as these: rouse the inventive principle; augment capital forma- tion; promote science and art by encouraging the discovery of new arts and improvement of the old; introduce arts and industries from progressive foreign countries; enable private individuals to produce domestically, when feasible, various goods formerly imported, thereby effecting a saving in transportation costs.' The various specific actions open to the legislator were grouped by Rae under two head- ings • (a) introduction of new arts and industries and stimulation of invention; (b) augmentation of the rate of capital formation.'

9. E.g., see New Principles, pp. 7-8, 358-62; also p. 15 where he says that "the object" of the nation is "to create," which means, to add to the nation's "wealth." 1. Ibid., pp. 15, 125, 343-44; also references cited in next note; also p. xi where he says that "individuals grow rich by the acquisition of wealth previously existing; nations, by the creation of wealth that did not before exist." 2. Ibid., pp. 32 ff., 48-49, 65 ff., 68, 70 ff., 343-44, 359; also pp. 70-72 where Rae indicates when assistance to private entrepreneurs is warranted. 3. "The whole society, or rather the legislator, the power acting for the whole society, might do so, and in some particular cases has done so, and, to judge of the measure by the events consequent on it, with the happiest success." Ibid., p. 56; also pp. 75-76. 4. Ibid., Book I, esp. pp. 11, 15-16, 31, 45-49, 56, also pp. 368, 377. That new industries could be introduced from abroad despite difficulties (see ibid., pp. 51-55) attendant upon such transfer, was evident from the fact that, when war interrupted commerce, peoples often learned to produce at home what they had theretofore imported from abroad. Ibid., pp. 49-50, 68-71. 5. But see ibid., p. 362, where improvement of cultural factors is treated separately. Presumably Rae also had education in mind, since he wrote or planned to write several pieces on education. Moreover, as has been remarked, he was himself a very learned man, his range of knowledge including mathe- matics and the classics. See Mixter, Sociological Theory of Capital, pp. xxiii, xxxiii, and James, op. cit. 404 QUARTERLY JOURNAL OF ECONOMICS

The state could foster capital formation in two ways. It could do so indirectly by "the establishment of good laws and the security of the system of government," by preventing crime and waste and destruction, by promoting intelligence and morality, and possibly by facilitating the establishment of such institutional instruments Downloaded from https://academic.oup.com/qje/article/73/3/393/1873379 by guest on 27 September 2021 as banking.' It could do so directly by curbing the dissipation of funds in luxuries and diverting the amounts thereby saved "to the purposes of the state," that is, "to the construction and maintenance of public works, to the encouragement of science and art by pre- miums," etc.' Duties and taxes might be imposed upon luxuries to accomplish this purpose, or their use might be interdicted, or "the social and benevolent affections and intellectual powers" which were unfavorable to "vanity" might be strengthened.' Rae attached most importance to policies suited to introduce industries, arts, and methods from more progressive countries, or to develop them independently at home, given that a country was sufficiently advanced and suitably equipped with resources for such an undertaking. In essence he was an exponent of infant-industry protectionism. But he rested his case for such temporary protection primarily upon the society-transforming power of invention. There was virtually no limit to what might be accomplished through prog- ress in knowledge and invention, given an adequate supply of capital and requisite raw materials (whose supply also was augmentable through invention). "Because one country now produces particular commodities, we are by no means warranted to conclude that nature intended they should be produced only there" ; and he pointed to

Great Britain, whose productions were "entirely the work of art." , No country was secure in any production monopoly it currently enjoyed. "As there are no limits to the inventive faculty, so no

6. New Principles, pp. 318-19, 187 ff., 397 ff.; also p. 312 on losses attribut- able to fraud and violence and pp. 95 ff. on intercountry differences in societal institutions. See also p. 362 where Rae says that increase of stock is advanced "by whatever promotes the general intelligence and morality of the society; and that, consequently, the moral and intellectual education of the people makes an important element in its progress." See also p. 378 on the role of enlightened public opinion. 7. Ibid., pp. xvi, 318, 362, 369, 377. He devoted two chapters to "luxury," Book II, Chap. 11, and Book III, Chap. 2. 8. Ibid., pp. 279-80, 373-76, 384-85. On p. 318 he states that "the inter- diction of a pure luxury occasions . . . no loss whatever to the whole society. It can scarcely fail to produce a gain." See also pp. 289-92 where Rae indicated that invention, by cheapening goods, might remove them from the class of luxuries (ibid., pp. 291-92, 318). Of interest but not relevant to the theme of this paper are Rae's comments on "utility," ibid., pp. 93, 97-98, 300-312. 9. Ibid., p. 258. JOHN RAE ON ECONOMIC DEVELOPMENT 405 community can assure itself that any commodity which it now pro- duces and exports to some other community, may not come to be produced in that community, and so be no longer exported there.'" It was in order, therefore, "to introduce a manufacture from abroad, by the aid of the legislator, which, when so introduced, will furnish Downloaded from https://academic.oup.com/qje/article/73/3/393/1873379 by guest on 27 September 2021 a commodity for home consumption at as low, or at a lower price, than it can be bought for in the foreign country." 2 Such action would have the further effect of saving transport costs, stimulating inven- tion, and making the supply secure in times of war. 3 He argued more generally that "the increase of the wealth of every community is acknowledged to be dependent, not only on the accumulation of capital and division of labor among its members, but also on the progress of arts in other communities, and their subsequent transfer to it"; and he pointed to the favorable experience of England, the United States, and Russia with imported arts and industries.' Rae did not discuss the promotion of immigration, perhaps because he thought immigrants would come any way; but he remarked that immigrants bring new methods, and, by making possible a mingling of diverse peoples and arts, gave rise to a situation favorable to invention and inimical to "servile imitation." 5

III Rae's place in the history of economic thought is secure, as was indicated at the start of this note.' His major contribution consisted 1. Ibid., p. 304. 2. Ibid., pp. 70-71, 76-77; also p. 367 where it is said that the legislator "is never justified" in attempting to introduce arts from abroad when there is no prospect that production costs will fall sufficiently. To this stipulation he made one exception, namely, if a commodity were so essential that interruption of its importation by war would seriously injure the importing nation's economy (ibid., pp. 366-68). 3. Ibid., pp. 364-66. Earlier (ibid., pp. 173-74) Rae had said that men had assembled in towns and villages to reduce transport costs consequent on the division of labor. 4. Ibid., pp. 76-77, 264, also 312, 367-68; also 316-17 on the introduction of improved British agricultural methods into Norway. 5. Ibid., pp. 237-38. Respecting Britain and the United States he said: "Servile imitation can there have no place, for there is no common standard to imitate" (ibid., p. 238). Cf. A. Marshall, Industry and Trade (London, 1927), p. 146. Rae could not foresee that, as Marshall observed (ibid., p. 146), ethnic heterogeneity makes for homogeneity "in matters of consumption." At one time Rae prepared a work intended in part to inform immigrants to Canada of its resources. See James, op. cit., p. 144. 6. Schumpeter, the apostle of innovation, in his History of Economic Anal- ysis (New York, 1954), touches a number of times upon Rae's work. Rae had a "conception of the economic process, which soars above the pedestrian view 406 QUARTERLY JOURNAL OF ECONOMICS

in his recognition of the importance of the role of technical knowl- edge and invention in economic development, a role he was able to appreciate, however, only because he clearly recognized both the tendency of capital's productivity to fall and the limitations to which man's disposition and capacity to form capital were subject. Inven- Downloaded from https://academic.oup.com/qje/article/73/3/393/1873379 by guest on 27 September 2021 tion served in his system, as the division of labor did in Smith's, to prevent the advent of a stationary state at least so long as the inven- tive principle continued in effect. His contribution to political economy consisted in his appreciation of the role of the state in eco- nomic development, a role which, as many studies have since demon- strated, has been great and continues to be great in countries that are relatively backward as was Rae's Canada. In the course of his discussion of "luxury," a discussion apparently somewhat influenced by H. Storch's work, Rae contributed to the understanding of the formation of habits of consumption, remarking in particular the role of "vanity," the circumstances which strengthened or weakened it, and the place of serviceableness of commodities in fixing their rates of exchange. Here again his experience in a new country made him aware that there the scope for luxury was necessarily limited. Meth- odologically, Rae was quite modern in that, though he sought con- tinually to seek explanation in terms of his theoretical organon, he accommodated his organon and his interpretations to his inductive findings. Had he had at his command the opportunity for study which he craved, he might have greatly accelerated the progress of the economics of development.'

DUKE UNIVERSITY that it is the accumulation of capital per se that propels the capitalist engine." His theory of capital was "conceived in unprecedented depth and breadth." It included the two cornerstones of Biihm-Bawerk's structure: the proposition that `lengthening' the process of production (postponement) will usually increase the physical amount of final product"; and the proposition that man prefers an object immediately present to the same object certainly available at some future date. See ibid., pp. 468-69; also p. 846 where it is said that Mixter "greatly overstates the case for Rae" in respect of Btihm-Bawerk's work. 7. Rae's influence upon Canadian economic thought is treated by Crauford Goodwin in a study scheduled to be completed in 1960.