The connection of profit with the three constituents of cost of labor may probably be better seen by aid of the following illustration; it being premised that as yet money is not used, and that the laborers are paid in the articles which their money wages would have bought had money been used. For simplicity we will suppose that all articles of the laborer's consumption are represented by corn. Imagine a large woolen-mill employing 500 men, and paying them in corn; and suppose that one yard of woolen cloth exchanges for one bushel of corn in the open market. In the beginning, with a given condition of efficiency, suppose that each man produces on an average 1,200 yards of cloth, for which he is paid 1,000 bushels of corn:

500 men, each producing 1,200 yards, give a total product of 600,000 yards. 500 men, each paid 1,000 bushels, cause an outlay of 500,000 yards. Profit: 100,000 yards.

(1.) Now suppose a change increasing the efficiency of labor to such an extent that each laborer produces 1,300 instead of 1,200 yards, then the account will stand, if the other elements remain unchanged:

500 men, each producing 1,300 yards, give a total product of 650,000 yards. 500 men, each paid 1,000 bushels, cause an outlay of 500,000 yards. Profit: 150,000 yards.

(2.) If efficiency and the cost of producing food remain the same as at first, suppose a change to occur which raises the quantity of corn each laborer receives from 1,000 to 1,100, or, as it is called, increases his real wages—then the account will be:

500 men, each producing 1,200 yards, give a total product of 600,000 yards. 500 men, each paid 1,100 bushels, cause an outlay of 550,000 yards. Profit: 50,000 yards.

(3.) If efficiency and real wages remain the same, suppose such an increase in the cost to the employers of obtaining corn that they are obliged to give one and one tenth yard of their goods for one bushel of corn (1,000 bushels of corn costing them 1,100 yards of cloth), then the statement will read:

500 men, each producing 1,200 yards, give a total product of 600,000 yards. 500 men, each paid 1,000 bushels, cause an outlay of 550,000 yards. Profit: 50,000 yards.



Chapter VI. Of Rent.



1. Rent the Effect of a Natural Monopoly.

The requisites of production being labor, capital, and natural agents, the only person, besides the laborer and the capitalist, whose consent is necessary to production, and who can claim a share of the produce as the price of that consent, is the person who, by the arrangements of society, possesses exclusive power over some natural agent. The land is the principal of the natural agents which are capable of being appropriated, and the consideration paid for its use is called rent. Landed proprietors are the only class, of any numbers or importance, who have a claim to a share in the distribution of the produce, through their ownership of something which neither they nor any one else have produced. If there be any other cases of a similar nature, they will be easily understood, when the nature and laws of rent are comprehended.

It is at once evident that rent is the effect of a monopoly. The reason why land-owners are able to require rent for their land is, that it is a commodity which many want, and which no one can obtain but from them. If all the land of the country belonged to one person, he could fix the rent at his pleasure. This case, however, is nowhere known to exist; and the only remaining supposition is that of free competition; the land-owners being supposed to be, as in fact they are, too numerous to combine.

The ratio of the land to the cultivators shows the limited quantity of land. It is very desirable to keep the connection of one part of the subject with another wherever possible. "Agricultural rent, as it actually exists," says Mr. Cairnes,(180) truly, "is not a consequence of the monopoly of the soil, but of its diminishing productiveness." The doctrine of rent depends upon the law of diminishing returns; and it is only by the pressure of population upon land that the lessened productiveness of land, whether because of poorer qualities or poorer situations, is made apparent. Or, to take things in their natural sequence, an increase of population necessitates more food; and this implies a resort to more expensive methods, or poorer soils, so soon as land is pushed to the extent that it will not yield an increased crop for the same application of labor and capital as formerly. Different qualities of land, then, being in cultivation at the same time, the better qualities must, of course, yield a greater return than the poorer, and the conditions then exist under which land pays rent. Those, therefore, who admit the law of diminishing returns are inevitably led to the doctrine of rent.



2. No Land can pay Rent except Land of such Quality or Situation as exists in less Quantity than the Demand.

A thing which is limited in quantity, even though its possessors do not act in concert, is still a monopolized article. But even when monopolized, a thing which is the gift of nature, and requires no labor or outlay as the condition of its existence, will, if there be competition among the holders of it, command a price only if it exist in less quantity than the demand.

If the whole land of a country were required for cultivation, all of it might yield a rent. But in no country of any extent do the wants of the population require that all the land, which is capable of cultivation, should be cultivated. The food and other agricultural produce which the people need, and which they are willing and able to pay for at a price which remunerates the grower, may always be obtained without cultivating all the land; sometimes without cultivating more than a small part of it; the more fertile lands, or those in the more convenient situations, being of course preferred. There is always, therefore, some land which can not, in existing circumstances, pay any rent; and no land ever pays rent unless, in point of fertility or situation, it belongs to those superior kinds which exist in less quantity than the demand—which can not be made to yield all the produce required for the community, unless on terms still less advantageous than the resort to less favored soils. (1.) The worst land which can be cultivated as a means of subsistence is that which will just replace the seed and the food of the laborers employed on it, together with what Dr. Chalmers calls their secondaries; that is, the laborers required for supplying them with tools, and with the remaining necessaries of life. Whether any given land is capable of doing more than this is not a question of political economy, but of physical fact. The supposition leaves nothing for profits, nor anything for the laborers except necessaries: the land, therefore, can only be cultivated by the laborers themselves, or else at a pecuniary loss; and, a fortiori, can not in any contingency afford a rent. (2.) The worst land which can be cultivated as an investment for capital is that which, after replacing the seed, not only feeds the agricultural laborers and their secondaries, but affords them the current rate of wages, which may extend to much more than mere necessaries, and leaves, for those who have advanced the wages of these two classes of laborers, a surplus equal to the profit they could have expected from any other employment of their capital. (3.) Whether any given land can do more than this is not merely a physical question, but depends partly on the market value of agricultural produce. What the land can do for the laborers and for the capitalist, beyond feeding all whom it directly or indirectly employs, of course depends upon what the remainder of the produce can be sold for. The higher the market value of produce, the lower are the soils to which cultivation can descend, consistently with affording to the capital employed the ordinary rate of profit.

As, however, differences of fertility slide into one another by insensible gradations; and differences of accessibility, that is, of distance from markets do the same; and since there is land so barren that it could not pay for its cultivation at any price; it is evident that, whatever the price may be, there must in any extensive region be some land which at that price will just pay the wages of the cultivators, and yield to the capital employed the ordinary profit, and no more. Until, therefore, the price rises higher, or until some improvement raises that particular land to a higher place in the scale of fertility, it can not pay any rent. It is evident, however, that the community needs the produce of this quality of land; since, if the lands more fertile or better situated than it could have sufficed to supply the wants of society, the price would not have risen so high as to render its cultivation profitable. This land, therefore, will be cultivated; and we may lay it down as a principle that, so long as any of the land of a country which is fit for cultivation, and not withheld from it by legal or other factitious obstacles, is not cultivated, the worst land in actual cultivation (in point of fertility and situation together) pays no rent.



3. The Rent of Land is the Excess of its Return above the Return to the worst Land in Cultivation.

If, then, of the land in cultivation, the part which yields least return to the labor and capital employed on it gives only the ordinary profit of capital, without leaving anything for rent, a standard [i.e., the "margin of cultivation"] is afforded for estimating the amount of rent which will be yielded by all other land. Any land yields just as much more than the ordinary profits of stock as it yields more than what is returned by the worst land in cultivation. The surplus is what the farmer can afford to pay as rent to the landlord; and since, if he did not so pay it, he would receive more than the ordinary rate of profit, the competition of other capitalists, that competition which equalizes the profits of different capitals, will enable the landlord to appropriate it. The rent, therefore, which any land will yield, is the excess of its produce, beyond what would be returned to the same capital if employed on the worst land in cultivation.

It has been denied that there can be any land in cultivation which pays no rent, because landlords (it is contended) would not allow their land to be occupied without payment. Inferior land, however, does not usually occupy, without interruption, many square miles of ground; it is dispersed here and there, with patches of better land intermixed, and the same person who rents the better land obtains along with it the inferior soils which alternate with it. He pays a rent, nominally for the whole farm, but calculated on the produce of those parts alone (however small a portion of the whole) which are capable of returning more than the common rate of profit. It is thus scientifically true that the remaining parts pay no rent.

This point seems to need some illustration. Suppose that all the lands in a community are of five different grades of productiveness. When the price of agricultural produce was such that grades one, two, and three all came into cultivation, lands of poorer quality would not be cultivated. When a man rents a farm, he always gets land of varying degrees of fertility within its limits. Now, in determining what he ought to pay as rent, the farmer will agree to give that which will still leave him a profit on his working capital; if in his fields he finds land which would not enter into the question of rental, because it did not yield more than the profit on working it, after he rented the farm he would find it to his interest to cultivate it, simply because it yielded him a profit, and because he was not obliged to pay rent upon it; if required to pay rent for it, he would lose the ordinary rate of profit, would have no reason for cultivating it, of course, and would throw it out of cultivation. Moreover, suppose that lands down to grade three paid rent when A took the farm; now, if the price of produce rises slightly, grade four may pay something, but possibly not enough to warrant any rent going to a landlord. A will put capital on it for this return, but certainly not until the price warrants it; that is, not until the price will return him at least the cost of working the land, plus the profit on his outlay. But the community needed this land, or the price would not have gone up to the point which makes possible its cultivation even for a profit, without rent. There must always be somewhere some land affected in just this way.



4. —Or to the Capital employed in the least advantageous Circumstances.

Let us, however, suppose that there were a validity in this objection, which can by no means be conceded to it; that, when the demand of the community had forced up food to such a price as would remunerate the expense of producing it from a certain quality of soil, it happened nevertheless that all the soil of that quality was withheld from cultivation, the increase of produce, which the wants of society required, would for the time be obtained wholly (as it always is partially), not by an extension of cultivation, but by an increased application of labor and capital to land already cultivated.

Now we have already seen that this increased application of capital, other things being unaltered, is always attended with a smaller proportional return. The rise of price enables measures to be taken for increasing the produce, which could not have been taken with profit at the previous price. The farmer uses more expensive manures, or manures land which he formerly left to nature; or procures lime or marl from a distance, as a dressing for the soil; or pulverizes or weeds it more thoroughly; or drains, irrigates, or subsoils portions of it, which at former prices would not have paid the cost of the operation; and so forth. The farmer or improver will only consider whether the outlay he makes for the purpose will be returned to him with the ordinary profit, and not whether any surplus will remain for rent. Even, therefore, if it were the fact that there is never any land taken into cultivation, for which rent, and that too of an amount worth taking into consideration, was not paid, it would be true, nevertheless, that there is always some agricultural capital which pays no rent, because it returns nothing beyond the ordinary rate of profit: this capital being the portion of capital last applied—that to which the last addition to the produce was due; or (to express the essentials of the case in one phrase) that which is applied in the least favorable circumstances. But the same amount of demand and the same price, which enable this least productive portion of capital barely to replace itself with the ordinary profit, enable every other portion to yield a surplus proportioned to the advantage it possesses. And this surplus it is which competition enables the landlord to appropriate.

If land were all occupied, and of only one grade, the first installment of labor and capital produced, we will say, twenty bushels of wheat; when the price of wheat rose, and it became profitable to resort to greater expense on the soil, a second installment of the same amount of labor and capital when applied, however, only yielded fifteen bushels more; a third, ten bushels more; and a fourth, five bushels more. The soil now gives fifty bushels only under the highest pressure. But, if it was profitable to invest the same installment of labor and capital simply for the five bushels that at first had received a return of twenty bushels, the price must have gone up so that five bushels should sell for as much as the twenty did formerly; so, mutatis mutandis, of installments second and third. So that if the demand is such as to require all of the fifty bushels, the agricultural capital which produced the five bushels will be the standard according to which the rent of the capital, which grew twenty, fifteen, and ten bushels respectively, is measured. The principle is exactly the same as if equal installments of capital and labor were invested on four different grades of land returning twenty, fifteen, ten, and five bushels for each installment. Or, as if in the table on page 240, A, B, C, and D each represented different installments of the same amount of labor and capital put upon the same spot of ground, instead of being, as there, put upon different grades of land.

The rent of all land is measured by the excess of the return to the whole capital employed on it above what is necessary to replace the capital with the ordinary rate of profit, or, in other words, above what the same capital would yield if it were all employed in as disadvantageous circumstances as the least productive portion of it: whether that least productive portion of capital is rendered so by being employed on the worst soil, or by being expended in extorting more produce from land which already yielded as much as it could be made to part with on easier terms.

It will be true that the farmer requires the ordinary rate of profit on the whole of his capital; that whatever it returns to him beyond this he is obliged to pay to the landlord, but will not consent to pay more; that there is a portion of capital applied to agriculture in such circumstances of productiveness as to yield only the ordinary profits; and that the difference between the produce of this and of any other capital of similar amount is the measure of the tribute which that other capital can and will pay, under the name of rent, to the landlord. This constitutes a law of rent, as near the truth as such a law can possibly be; though of course modified or disturbed, in individual cases, by pending contracts, individual miscalculations, the influence of habit, and even the particular feelings and dispositions of the persons concerned.

The law of rent, in the economic sense, operates in the United States as truly as elsewhere, although there is no separate class of landlords here. With us, almost all land is owned by the cultivator; so that two functions, those of the landlord and farmer, are both united in one person. Although one payment is made, it is still just as distinctly made up of two parts, one of which is a payment to the owner for the superior quality of his soil, and the other a payment (to the same person, if the owner is the cultivator) of profit on the farmer's working capital. Land which in the United States will only return enough to pay a profit on this capital can not pay any rent. And land which can pay more than a profit on this working capital, returns that excess as rent, even if the farmer is also the owner and landlord. The principle which regulates the amount of that excess—which is the essential point—is the principle which determines the amount of economic rent, and it holds true in the United States or Finland, provided only that different grades of land are called into cultivation. The governing principle is the same, no matter whether a payment is made to one man as profit and to another as rent, or whether the two payments are made to the same man in two capacities. It has been urged that the law of rent does not hold in the United States, because "the price of grain and other agricultural produce has not risen in proportion to the increase of our numbers, as it ought to have done if Ricardo's theory were true, but has fallen, since 1830, though since that time our population has been more than tripled."(181) This overlooks the fact that we have not even yet taken up all our best agricultural lands, so that for some products the law of diminishing productiveness has not yet shown itself. The reason is, that the extension of our railway system has only of late years brought the really good grain-lands into cultivation. The fact that there has been no rise in agricultural products is due to the enormous extent of marvelously fertile grain-lands in the West, and to the cheapness of transportation from those districts to the seaboard.

For a general understanding of the law of rent the following table will show how, under constant increase of population (represented by four different advances of population, in the first column), first the best and then the poorer lands are brought into cultivation. We will suppose (1) that the most fertile land, A, at first pays no rent; then (2), when more food is wanted than land A can supply, it will be profitable to till land B, but which, as yet, pays no rent. But if eighteen bushels are a sufficient return to a given amount of labor and capital, then when an equal amount of labor and capital engaged on A returns twenty-four bushels, six of that are beyond the ordinary profit, and form the rent on land A, and so on; C will next be the line of comparison, and then D; as the poorer soils are cultivated, the rent of A increases:

Population A B C D Increase. 24 18 12 6 bushels bushels bushels bushels Total Rent in Total Rent in Total Rent in Total Rent in product Bushels product Bushels product Bushels product Bushels I. 24 0 .. .. .. .. .. .. II. 24 6 18 0 .. .. .. .. III. 24 12 18 6 12 0 .. .. IV. 24 18 18 12 12 6 6 0



5. Opposing Views of the Law of Rent.

Under the name of rent, many payments are commonly included, which are not a remuneration for the original powers of the land itself, but for capital expended on it. The buildings are as distinct a thing from the farm as the stock or the timber on it; and what is paid for them can no more be called rent of land than a payment for cattle would be, if it were the custom that the landlord should stock the farm for the tenant. The buildings, like the cattle, are not land, but capital, regularly consumed and reproduced; and all payments made in consideration for them are properly interest.

But with regard to capital actually sunk in improvements, and not requiring periodical renewal, but spent once for all in giving the land a permanent increase of productiveness, it appears to me that the return made to such capital loses altogether the character of profits, and is governed by the principles of rent. It is true that a landlord will not expend capital in improving his estate unless he expects from the improvement an increase of income surpassing the interest of his outlay. Prospectively, this increase of income may be regarded as profit; but, when the expense has been incurred and the improvement made, the rent of the improved land is governed by the same rules as that of the unimproved.

Mr. Carey (as well as Bastiat) has declared that there is a law of increasing returns from land. He points out that everything now existing could be reproduced to-day at a less cost than that involved in its original production, owing to our advance in skill, knowledge, and all the arts of production; that, for example, it costs less to make an axe now than it did five hundred years ago; so also with a farm, since a farm of a given amount of productiveness can be brought into cultivation at less cost to-day than that originally spent upon it. The gain of society has, we all admit, been such that we produce almost everything at a less cost now than long ago; but to class a farm and an axe together overlooks, in the most remarkable way, the fact that land can not be created by labor and capital, while axes can, and that too indefinitely. Nor can the produce from the land be increased indefinitely at a diminishing cost. This is sometimes denied by the appeal to facts: "It can be abundantly proved that, if we take any two periods sufficiently distant to afford a fair test, whether fifty or one hundred or five hundred years, the production of the land relatively to the labor employed upon it has progressively become greater and greater."(182) But this does not prove that an existing tendency to diminishing returns has not been more than offset by the progress of the arts and improvements. "The advance of a ship against wind and tide is [no] proof that there is no wind and tide."

In a work entitled "The Past, the Present, and the Future," Mr. Carey takes [a] ground of objection to the Ricardo theory of rent, namely, that in point of historical fact the lands first brought under cultivation are not the most fertile, but the barren lands. "We find the settler invariably occupying the high and thin lands requiring little clearing and no drainage. With the growth of population and wealth, other soils yielding a larger return to labor are always brought into activity, with a constantly increasing return to the labor expended upon them."

In whatever order the lands come into cultivation, those which when cultivated yield the least return, in proportion to the labor required for their culture, will always regulate the price of agricultural produce; and all other lands will pay a rent simply equivalent to the excess of their produce over this minimum. Whatever unguarded expressions may have been occasionally used in describing the law of rent, these two propositions are all that was ever intended by it. If, indeed, Mr. Carey could show that the return to labor from the land, agricultural skill and science being supposed the same, is not a diminishing return, he would overthrow a principle much more fundamental than any law of rent. But in this he has wholly failed.

Another objection taken against the law of diminishing returns, and so against the law of rent, is that the potential increase of food, e.g., of a grain of wheat, is far greater than that of man.(183) No one disputes the fact that one grain of wheat can reproduce itself more times than man, and that too in a geometric increase; but not without land. A grain of wheat needs land in which it can multiply itself, and this necessary element of its increase is limited; and it is the very thing which limits the multiplication of the grains of wheat. On the same piece of land, one can not get more than what comes from one act of reproduction in the grain. If one grain produces 100 of its kind, doubling the capital will not repeatedly cause a geometric increase in the ratio of reproduction of each grain on this same land, so that one grain, by one process, produces of its kind 200, 400, 800, or 1,600, because you can not multiply the land in any such ratio as would accompany this potential reduplication of the grain. This objection would not seem worth answering, were it not that it furnishes some difficulty to really honest inquirers.

Others, again, allege as an objection against Ricardo, that if all land were of equal fertility it might still yield a rent. But Ricardo says precisely the same. It is also distinctly a portion of Ricardo's doctrine that, even apart from differences of situation, the land of a country supposed to be of uniform fertility would, all of it, on a certain supposition, pay rent, namely, if the demand of the community required that it should all be cultivated, and cultivated beyond the point at which a further application of capital begins to be attended with a smaller proportional return.

This is simply the question, before discussed, whether, if only one class of land were cultivated, some agricultural capital would pay rent or not. It all depends on the fact whether population—and so the demand for food—has increased to the point where it calls out a recognition of the diminishing productiveness of the soil. In that case different capitals would be invested, so that there would be different returns to the same amount of capital; and the prior or more advantageous investments of capital on the land would yield more than the ordinary rate of profit, which could be claimed as rent.

A. L. Perry(184) admits the law of diminishing returns, but holds that, "as land is capital, and as every form of capital may be loaned or rented, and thus become fruitful in the hands of another, the rent of land does not differ essentially in its nature from the rent of buildings in cities, or from the interest of money." Henry George admits Ricardo's law of rent to its full extent, but very curiously says: "Irrespective of the increase of population, the effect of improvements in methods of production and exchange is to increase rent.... The effect of labor-saving improvements will be to increase the production of wealth. Now, for the production of wealth, two things are required, labor and land. Therefore, the effect of labor-saving improvements will be to extend the demand for land, and, wherever the limit of the quality of land in use is reached, to bring into cultivation lands of less natural productiveness, or to extend cultivation on the same lands to a point of lower natural productiveness. And thus, while the primary effect of labor-saving improvements is to increase the power of labor, the secondary effect is to extend cultivation, and, where this lowers the margin of cultivation, to increase rent."(185) Francis Bowen(186) rejects Ricardo's law, and says, "Rent depends, not on the increase, but on the distribution, of the population"—asserting that the existence of large cities and towns determines the amount of rent paid by neighboring land.(187)



6. Rent does not enter into the Cost of Production of Agricultural Produce.

Rent does not really form any part of the expenses of [agricultural] production, or of the advances of the capitalist. The grounds on which this assertion was made are now apparent. It is true that all tenant-farmers, and many other classes of producers, pay rent. But we have now seen that whoever cultivates land, paying a rent for it, gets in return for his rent an instrument of superior power to other instruments of the same kind for which no rent is paid. The superiority of the instrument is in exact proportion to the rent paid for it. If a few persons had steam-engines of superior power to all others in existence, but limited by physical laws to a number short of the demand, the rent which a manufacturer would be willing to pay for one of these steam-engines could not be looked upon as an addition to his outlay, because by the use of it he would save in his other expenses the equivalent of what it cost him: without it he could not do the same quantity of work, unless at an additional expense equal to the rent. The same thing is true of land. The real expenses of production are those incurred on the worst land, or by the capital employed in the least favorable circumstances. This land or capital pays, as we have seen, no rent, but the expenses to which it is subject cause all other land or agricultural capital to be subjected to an equivalent expense in the form of rent. Whoever does pay rent gets back its full value in extra advantages, and the rent which he pays does not place him in a worse position than, but only in the same position as, his fellow-producer who pays no rent, but whose instrument is one of inferior efficiency.

Soils are of every grade: some, which if cultivated, might replace the capital, but give no profit; some give a slight but not an ordinary profit; some, the ordinary profit. That is, "there is a point up to which it is profitable to cultivate, and beyond which it is not profitable to cultivate. The price of corn will not, for any long time, remain at a higher rate than is sufficient to cover with ordinary profit the cost of that portion of the general crop which is raised at greatest expense."(188) For similar reasons the price will not remain at a lower rate. If, then, the cost of production of grain is determined by that land which replaces the capital, yields only the ordinary profit, and pays no rent, rent forms no part of this cost, since that land does not and can not pay any rent. McLeod,(189) however, says it is not the cost of production which regulates the value of agricultural produce, but the value which regulates the cost.



BOOK III. EXCHANGE.



Chapter I. Of Value.



1. Definitions of Value in Use, Exchange Value, and Price.

It is evident that, of the two great departments of Political Economy, the production of wealth and its distribution, the consideration of Value has to do with the latter alone; and with that only so far as competition, and not usage or custom, is the distributing agency.

The use of a thing, in political economy, means its capacity to satisfy a desire, or serve a purpose. Diamonds have this capacity in a high degree, and, unless they had it, would not bear any price. Value in use, or, as Mr. De Quincey calls it, teleologic value, is the extreme limit of value in exchange. The exchange value of a thing may fall short, to any amount, of its value in use; but that it can ever exceed the value in use implies a contradiction; it supposes that persons will give, to possess a thing, more than the utmost value which they themselves put upon it, as a means of gratifying their inclinations.

The word Value, when used without adjunct, always means, in political economy, value in exchange.

Exchange value requires to be distinguished from Price. Writers have employed Price to express the value of a thing in relation to money—the quantity of money for which it will exchange. By the price of a thing, therefore, we shall henceforth understand its value in money; by the value, or exchange value of a thing, its general power of purchasing; the command which its possession gives over purchasable commodities in general. What is meant by command over commodities in general? The same thing exchanges for a greater quantity of some commodities, and for a very small quantity of others. A coat may exchange for less bread this year than last, if the harvest has been bad, but for more glass or iron, if a tax has been taken off those commodities, or an improvement made in their manufacture. Has the value of the coat, under these circumstances, fallen or risen? It is impossible to say: all that can be said is, that it has fallen in relation to one thing, and risen in respect to another. Suppose, for example, that an invention has been made in machinery, by which broadcloth could be woven at half the former cost. The effect of this would be to lower the value of a coat, and, if lowered by this cause, it would be lowered not in relation to bread only or to glass only, but to all purchasable things, except such as happened to be affected at the very time by a similar depressing cause. Those [changes] which originate in the commodities with which we compare it affect its value in relation to those commodities; but those which originate in itself affect its value in relation to all commodities.

There is such a thing as a general rise of prices. All commodities may rise in their money price. But there can not be a general rise of values. It is a contradiction in terms. A can only rise in value by exchanging for a greater quantity of B and C; in which case these must exchange for a smaller quantity of A. All things can not rise relatively to one another. If one half of the commodities in the market rise in exchange value, the very terms imply a fall of the other half; and, reciprocally, the fall implies a rise. Things which are exchanged for one another can no more all fall, or all rise, than a dozen runners can each outrun all the rest, or a hundred trees all overtop one another. A general rise or a general fall of prices is merely tantamount to an alteration in the value of money, and is a matter of complete indifference, save in so far as it affects existing contracts for receiving and paying fixed pecuniary amounts.

Before commencing the inquiry into the laws of value and price, I have one further observation to make. I must give warning, once for all, that the cases I contemplate are those in which values and prices are determined by competition alone. In so far only as they are thus determined, can they be reduced to any assignable law. The buyers must be supposed as studious to buy cheap as the sellers to sell dear.

The reader is advised to study the definitions of value given by other writers. Cairnes(190) defines value as "the ratio in which commodities in open market are exchanged against each other." F. A. Walker(191) holds that "value is the power which an article confers upon its possessor, irrespective of legal authority or personal sentiments, of commanding, in exchange for itself, the labor, or the products of the labor, of others." Carey(192) says, "Value is the measure of the resistance to be overcome in obtaining those commodities or things required for our purposes—of the power of nature over man." Value is thus, with him, the antithesis of wealth, which is (according to Carey) the power of man over nature. In this school, value is the service rendered by any one who supplies the article for the use of another. This is also Bastiat's idea,(193) "le rapport de deux services echanges." Following Bastiat, A. L. Perry(194) defines value as "always and everywhere the relation of mutual purchase established between two services by their exchange." Roscher(195) explains exchange value as "the quality which makes them exchangeable against other goods." He also makes a distinction between utility and value in use: "Utility is a quality of things themselves, in relation, it is true, to human wants. Value in use is a quality imputed to them, the result of man's thought, or his view of them. Thus, for instance, in a beleaguered city, the stores of food do not increase in utility, but their value in use does." Levasseur(196) regards value as "the relation resulting from exchange"—le rapport resultant de l'echange. Cherbuliez(197) asserts that "the value of a product or of a service can be expressed only as the products or services which it obtains in exchange.... If I exchange the thing A against B, A is the value of B, B is the value of A." Jevons(198) defines value as "proportion in exchange."



2. Conditions of Value: Utility, Difficulty of Attainment, and Transferableness.

That a thing may have any value in exchange, two conditions are necessary. 1. It must be of some use; that is (as already explained), it must conduce to some purpose, satisfy some desire. No one will pay a price, or part with anything which serves some of his purposes, to obtain a thing which serves none of them. 2. But, secondly, the thing must not only have some utility, there must also be some difficulty in its attainment.

The question is one as to the conditions essential to the existence of any value. Very justly Cairnes(199) adds also a third condition, "the possibility of transferring the possession of the articles which are the subject of the exchange." For instance, a cargo of wheat at the bottom of the sea has value in use and difficulty of attainment, but it is not transferable. Jevons (following J. B. Say) maintains that "value depends entirely on utility." If utility means the power to satisfy a desire, things which merely have utility and no difficulty of attainment could have no exchange value.(200) F. A. Walker(201) believes that "value depends wholly on the relation between demand and supply." Carey(202) holds that value depends merely on the cost of reproduction of the given article. Roscher(203) finds that exchange value is "based on a combination of value in use with cost value." Cherbuliez(204) calls the conditions of value two, "the ability to give satisfaction, and inability of attainment without effort. The first element is subjective; it is determined wholly by the needs or desires of the parties to the exchange. The second is objective; it depends upon material considerations, which are the conditions of the existence of the thing, and upon which the needs of the persons exchanging have no influence whatever." It is, as usual, one of Cherbuliez's clear expositions. A. L. Perry(205) states that, "while value always takes its rise in the desires of men, it is never realized except through the efforts of men, and through these efforts as mutually exchanged."

The difficulty of attainment which determines value is not always the same kind of difficulty: (1.) It sometimes consists in an absolute limitation of the supply. There are things of which it is physically impossible to increase the quantity beyond certain narrow limits. Such are those wines which can be grown only in peculiar circumstances of soil, climate, and exposure. Such also are ancient sculptures; pictures by the old masters; rare books or coins, or other articles of antiquarian curiosity. Among such may also be reckoned houses and building-ground, in a town of definite extent.

De Quincey(206) has presented some ingenious diagrams to represent the operations of the two constituents of value in each of the three following cases: U represents the power of the article to satisfy some desire, and D difficulty of attainment. In the first case, exchange value is not hindered by D from going up to any height, and so it rises and falls entirely according to the force of U. D being practically infinite, the horizontal line, exchange value, is not kept down by D, but it rises just as far as U, the desires of purchasers, may carry it.



(2.) But there is another category (embracing the majority of all things that are bought and sold), in which the obstacle to attainment consists only in the labor and expense requisite to produce the commodity. Without a certain labor and expense it can not be had; but, when any one is willing to incur these, there needs be no limit to the multiplication of the product. If there were laborers enough and machinery enough, cottons, woolens, or linens might be produced by thousands of yards for every single yard now manufactured.

In case (2) the horizontal line, representing exchange value, follows the force of D entirely. The utility of the article is very great, but the value is only limited by the difficulty of obtaining it. So far as U is concerned, exchange value can go up a great distance, but will go no higher than the point where the article can be obtained. The dotted lines underneath the horizontal line indicate that the exchange value of articles in this class tend to fall in value.



(3.) There is a third case, intermediate between the two preceding, and rather more complex, which I shall at present merely indicate, but the importance of which in political economy is extremely great. There are commodities which can be multiplied to an indefinite extent by labor and expenditure, but not by a fixed amount of labor and expenditure. Only a limited quantity can be produced at a given cost; if more is wanted, it must be produced at a greater cost. To this class, as has been often repeated, agricultural produce belongs, and generally all the rude produce of the earth; and this peculiarity is a source of very important consequences; one of which is the necessity of a limit to population; and another, the payment of rent.

In case (3) articles like agricultural produce have a very great power to satisfy desires, and if scarce would have a high value. So far as U is concerned, here also, as in case (2), exchange value might mount upward to almost any height, but it can go no higher than D permits. In commodities of this class, affected by the law of diminishing returns, the tendency is for D to increase, and so for exchange value to rise, as indicated by the dotted lines above that of the exchange value.





3. Commodities limited in Quantity by the law of Demand and Supply: General working of this Law.

These being the three classes, in one or other of which all things that are bought and sold must take their place, we shall consider them in their order. And first, of things absolutely limited in quantity, such as ancient sculptures or pictures.

Of such things it is commonly said that their value depends on their scarcity; others say that the value depends on the demand and supply. But this statement requires much explanation. The supply of a commodity is an intelligible expression: it means the quantity offered for sale; the quantity that is to be had, at a given time and place, by those who wish to purchase it. But what is meant by the demand? Not the mere desire for the commodity. A beggar may desire a diamond; but his desire, however great, will have no influence on the price. Writers have therefore given a more limited sense to demand, and have defined it, the wish to possess, combined with the power of purchasing.(207) To distinguish demand in this technical sense from the demand which is synonymous with desire, they call the former effectual demand.

General supply consists in the commodities offered in exchange for other commodities; general demand likewise, if no money exists, consists in the commodities offered as purchasing power in exchange for other commodities. That is, one can not increase the demand for certain things without increasing the supply of some articles which will be received in exchange for the desired commodities. Demand is based upon the production of articles having exchange value, in its economic sense; and the measure of this demand is necessarily the quantity of commodities offered in exchange for the desired goods. General demand and supply are thus reciprocal to each other. But as soon as money, or general purchasing power, is introduced, Mr. Cairnes(208) defines "demand as the desire for commodities or services, seeking its end by an offer of general purchasing power; and supply, as the desire for general purchasing power, seeking its end by an offer of specific commodities or services." But many persons find a difficulty because they insist upon separating the idea of supply from that of demand, owing to the fact that producers seem to be a distinct class in the community, different from consumers. That they are in reality the same persons can be easily explained by the following statement: "A certain number of people, A, B, C, D, E, F, etc., are engaged in industrial occupations—A produces for B, C, D, E, F; B for A, C, D, E, F; C for A, B, D, E, F, and so on. In each case the producer and the consumers are distinct, and hence, by a very natural fallacy, it is concluded that the whole body of consumers is distinct from the whole body of producers, whereas they consist of precisely the same persons."

But in regard to demand and supply of particular commodities (not general demand and supply), the increase of the demand is not necessarily followed by an increased supply, or vice versa. Out of the total production (which constitutes general demand) a varying amount, sometimes more, sometimes less, may be directed by the desires of men to the purchase of some given thing. This should be borne in mind, in connection with the future discussion of over-production. The identity of general demand with general supply shows there can be no general over-production: but so long as there exists the possibility that the demand for a particular commodity may diminish without a corresponding effect being thereby produced on the supply of that commodity, by a necessary connection, we see that there may be over-production of particular commodities; that is, a production in excess of the demand.

The proper mathematical analogy [between demand and supply] is that of an equation. If unequal at any moment, competition equalizes them, and the manner in which this is done is by an adjustment of the value. If the demand increases, the value rises; if the demand diminishes, the value falls; again, if the supply falls off, the value rises; and falls, if the supply is increased. The rise or the fall continues until the demand and supply are again equal to one another: and the value which a commodity will bring in any market is no other than the value which, in that market, gives a demand just sufficient to carry off the existing or expected supply.

Mr. Cairnes(209) finally defined market value as the price "which is sufficient, and no more than sufficient, to carry the existing supply over, with such a surplus as circumstances may render advisable, to meet the new supplies forthcoming," which is nothing more than a paraphrase of the words "existing or expected supply" just used by Mr. Mill. It seems unnecessary, therefore, that Mr. Cairnes should have added: "According to Mr. Mill, the actual market price is the price which equalizes supply and demand in a given market; as I view the case, the 'proper market price' is the price which equalizes supply and demand, not as existing in the particular market, but in the larger sense which I have assigned to the terms. To this price the actual market price will, according to my view, approximate, in proportion to the intelligence and knowledge of the dealers."

Adam Smith, who introduced the expression "effectual demand," employed it to denote the demand of those who are willing and able to give for the commodity what he calls its natural price—that is, the price which will enable it to be permanently produced and brought to market.(210)

This, then, is the Law of Value, with respect to all commodities not susceptible of being multiplied at pleasure.



4. Miscellaneous Cases falling under this Law.

There are but few commodities which are naturally and necessarily limited in supply. But any commodity whatever may be artificially so. The monopolist can fix the value as high as he pleases, short of what the consumer either could not or would not pay; but he can only do so by limiting the supply. Monopoly value, therefore, does not depend on any peculiar principle, but is a mere variety of the ordinary case of demand and supply.

Again, though there are few commodities which are at all times and forever unsusceptible of increase of supply, any commodity whatever may be temporarily so; and with some commodities this is habitually the case. Agricultural produce, for example, can not be increased in quantity before the next harvest; the quantity of corn already existing in the world is all that can be had for sometimes a year to come. During that interval, corn is practically assimilated to things of which the quantity can not be increased. In the case of most commodities, it requires a certain time to increase their quantity; and if the demand increases, then, until a corresponding supply can be brought forward, that is, until the supply can accommodate itself to the demand, the value will so rise as to accommodate the demand to the supply.

There is another case the exact converse of this. There are some articles of which the supply may be indefinitely increased, but can not be rapidly diminished. There are things so durable that the quantity in existence is at all times very great in comparison with the annual produce. Gold and the more durable metals are things of this sort, and also houses. The supply of such things might be at once diminished by destroying them; but to do this could only be the interest of the possessor if he had a monopoly of the article, and could repay himself for the destruction of a part by the increased value of the remainder. The value, therefore, of such things may continue for a long time so low, either from excess of supply or falling off in the demand, as to put a complete stop to further production; the diminution of supply by wearing out being so slow a process that a long time is requisite, even under a total suspension of production, to restore the original value. During that interval the value will be regulated solely by supply and demand, and will rise very gradually as the existing stock wears out, until there is again a remunerating value, and production resumes its course.

The total value of gold and silver in the world is variously estimated at from $10,000,000,000 to $14,000,000,000; while the annual production of both gold and silver in the world during 1882(211) was only $212,000,000. The loss of gold by abrasion is about 1/1000 annually, and of silver about 1/700, but much depends on the size of the coin. A change in the annual production of the precious metals can have a perceptible effect on their value only after such a time as will permit the change to affect the existing quantity in a way somewhat comparable with its previous amount. The quantity, however, of wheat produced is nearly all consumed between harvests; and the annual supply bears a very large ratio to the existing quantity. Consequently the price of wheat will be very seriously affected by the quantity coming from the annual product.

Finally, there are commodities of which, though capable of being increased or diminished to a great and even an unlimited extent, the value never depends upon anything but demand and supply. This is the case, in particular, with the commodity Labor, of the value of which we have treated copiously in the preceding book; and there are many cases besides in which we shall find it necessary to call in this principle to solve difficult questions of exchange value. This will be particularly exemplified when we treat of International Values; that is, of the terms of interchange between things produced in different countries, or, to speak more generally, in distant places.



5. Commodities which are Susceptible of Indefinite Multiplication without Increase of Cost. Law of their Value Cost of Production.

When the production of a commodity is the effect of labor and expenditure, whether the commodity is susceptible of unlimited multiplication or not, there is a minimum value which is the essential condition of its being permanently produced. The value at any particular time is the result of supply and demand, and is always that which is necessary to create a market for the existing supply. But unless that value is sufficient to repay the Cost of Production, and to afford, besides, the ordinary expectation of profit, the commodity will not continue to be produced. Capitalists will not go on permanently producing at a loss. When such profit is evidently not to be had, if people do not actually withdraw their capital, they at least abstain from replacing it when consumed. The cost of production, together with the ordinary profit, may, therefore, be called the necessary price or value of all things made by labor and capital. Nobody willingly produces in the prospect of loss.

When a commodity is not only made by labor and capital, but can be made by them in indefinite quantity, this Necessary Value, the minimum with which the producers will be content, is also, if competition is free and active, the maximum which they can expect. If the value of a commodity is such that it repays the cost of production not only with the customary but with a higher rate of profit, capital rushes to share in this extra gain, and, by increasing the supply of the article, reduces its value. This is not a mere supposition or surmise, but a fact familiar to those conversant with commercial operations. Whenever a new line of business presents itself, offering a hope of unusual profits, and whenever any established trade or manufacture is believed to be yielding a greater profit than customary, there is sure to be in a short time so large a production or importation of the commodity as not only destroys the extra profit, but generally goes beyond the mark, and sinks the value as much too low as it had before been raised too high, until the over-supply is corrected by a total or partial suspension of further production. As already intimated,(212) these variations in the quantity produced do not presuppose or require that any person should change his employment. Those whose business is thriving, increase their produce by availing themselves more largely of their credit, while those who are not making the ordinary profit, restrict their operations, and (in manufacturing phrase) work short time. In this mode is surely and speedily effected the equalization, not of profits, perhaps, but of the expectations of profit, in different occupations.

As a general rule, then, things tend to exchange for one another at such values as will enable each producer to be repaid the cost of production with the ordinary profit; in other words, such as will give to all producers the same rate of profit on their outlay. But in order that the profit may be equal where the outlay, that is, the cost of production, is equal, things must on the average exchange for one another in the ratio of their cost of production; things of which the cost of production is the same, must be of the same value.

Mr. Mill has here used cost of production almost exactly in the sense of cost of labor, and as excluding profit (while in the next chapter he includes some part of profit in the analysis). It will be well, for the sake of definiteness, to collect the phrases above in which he describes cost of production: "Unless that value is sufficient to repay the cost of production, and to afford, besides, the ordinary expectation of profit, the commodity will not continue to be produced"; "the cost of production, together with the ordinary profit, may therefore be called the necessary price, or value"; "it repays the cost of production, not only with the customary, but with a higher rate of profit"; "the cost of production with the ordinary profit—in other words, such as will give to all producers the same rate of profit on their outlay"; "that the profit may be equal where the outlay, that is, the cost of production, is equal." This is a view which distinctly uses cost of production in the sense of the outlay to the capitalist, or cost of labor. In no other way can profit vary with "cost of production" than in the sense that it is what a given article "costs to the capitalist"; but that is Mr. Mill's definition of cost of labor (p. 227). It is, however, very puzzling when in the next section he speaks of "the natural value, that is, the cost of production." Above, value included cost of production and profit also. Having thus pointed out what is Mr. Mill's conception of cost of production, it will remain for us in the next chapter to consider whether any other view of it is more satisfactory.

Adam Smith and Ricardo have called that value of a thing which is proportional to its cost of production, its Natural Value (or its Natural Price). They meant by this, the point about which the value oscillates, and to which it always tends to return; the center value, toward which, as Adam Smith expresses it, the market value of a thing is constantly gravitating; and any deviation from which is but a temporary irregularity which, the moment it exists, sets forces in motion tending to correct it. On an average of years sufficient to enable the oscillations on one side of the central line to be compensated by those on the other, the market value agrees with the natural value; but it very seldom coincides exactly with it at any particular time. The sea everywhere tends to a level, but it never is at an exact level; its surface is always ruffled by waves, and often agitated by storms. It is enough that no point, at least in the open sea, is permanently higher than another. Each place is alternately elevated and depressed; but the ocean preserves its level.



6. The Value of these Commodities confirm, in the long run, to their Cost of Production through the operation of Demand and Supply.

The latent influence by which the values of things are made to conform in the long run to the cost of production is the variation that would otherwise take place in the supply of the commodity. The supply would be increased if the thing continued to sell above the ratio of its cost of production, and would be diminished if it fell below that ratio.

If one dollar covers the expense of making one spade, then when a spade, by virtue of a sudden demand, rises in value to one dollar and ten cents, the manufacturers get an extra profit of ten cents. This could not long remain so, because other capital would enter this industry, and so increase the supply that one spade would sell for only one dollar; then all would receive the average profit. If, owing to a cessation of demand for spades, the price fell to ninety cents, then the manufacturers would lose ten cents on each one made and sold. Thereupon they would cease to do a losing business, capital would be withdrawn, and spades would not be made until the supply was suited to the necessary expense of making them (one dollar). In this way, whenever there is a departure of the value from the normal cost, there is set in motion ipso facto a series of forces which automatically restores the value to that cost. So here again we see the nature of an economic law: the value may not often correspond exactly with cost of production, but there is a tendency in all values to conform to that cost, and this tendency they irresistibly obey. A body possessing weight does not move downward under all circumstances (stones may be thrown upward), but the law of gravitation holds true, nevertheless.

There is no need that there should be any actual alteration of supply; and when there is, the alteration, if permanent, is not the cause but the consequence of the alteration in value. If, indeed, the supply could not be increased, no diminution in the cost of production would lower the value; but there is by no means any necessity that it should. The mere possibility often suffices; the dealers are aware of what would happen, and their mutual competition makes them anticipate the result by lowering the price.

Before the electric light was yet known as a feasible means of lighting (in 1878), the mere rumor of Edison's invention, before it was made public, and long before it became practicable, caused a serious fall in the price of gas stocks.

It is, therefore, strictly correct to say that the value of things which can be increased in quantity at pleasure does not depend (except accidentally, and during the time necessary for production to adjust itself) upon demand and supply; on the contrary, demand and supply depend upon it. There is a demand for a certain quantity of the commodity at its natural or cost value, and to that the supply in the long run endeavors to conform.

Mr. Cairnes(213) fitly says: "The supply of a commodity always tends to adapt itself to the demand at the normal price. I may here say briefly that by the normal price of a commodity I mean that price which suffices, and no more than suffices, to yield to the producers what is considered to be the average and usual remuneration on such sacrifices as they undergo."

When at any time it fails of so conforming, it is either from miscalculation, or from a change in some of the elements of the problem; either in the natural value, that is, in the cost of production, or in the demand, from an alteration in public taste, or in the number or wealth of the consumers. If a value different from the natural value be necessary to make the demand equal to the supply, the market value will deviate from the natural value; but only for a time, for the permanent tendency of supply is to conform itself to the demand which is found by experience to exist for the commodity when selling at its natural value. If the supply is either more or less than this, it is so accidentally, and affords either more or less than the ordinary rate of profit, which, under free and active competition, can not long continue to be the case.

To recapitulate: demand and supply govern the value of all things which can not be indefinitely increased; except that even for them, when produced by industry, there is a minimum value, determined by the cost of production. But in all things which admit of indefinite multiplication, demand and supply only determine the perturbations of value during a period which can not exceed the length of time necessary for altering the supply. While thus ruling the oscillations of value, they themselves obey a superior force, which makes value gravitate toward Cost of Production, and which would settle it and keep it there, if fresh disturbing influences were not continually arising to make it again deviate.



Chapter II. Ultimate Analysis Of Cost Of Production.



1. Of Labor, the principal Element in Cost of Production.

The component elements of Cost of Production have been set forth in the First Part of this inquiry.(214) The principal of them, and so much the principal as to be nearly the sole, was found to be Labor. What the production of a thing costs to its producer, or its series of producers, is the labor expended in producing it. If we consider as the producer the capitalist who makes the advances, the word Labor may be replaced by the word Wages: what the produce costs to him, is the wages which he has had to pay. At the first glance, indeed, this seems to be only a part of his outlay, since he has not only paid wages to laborers, but has likewise provided them with tools, materials, and perhaps buildings. These tools, materials, and buildings, however, were produced by labor and capital; and their value, like that of the article to the production of which they are subservient, depends on cost of production, which again is resolvable into labor. The cost of production of broadcloth does not wholly consist in the wages of weavers; which alone are directly paid by the cloth-manufacturer. It consists also of the wages of spinners and wool-combers, and, it may be added, of shepherds, all of which the clothier has paid for in the price of yarn. It consists, too, of the wages of builders and brick-makers, which he has reimbursed in the contract price of erecting his factory. It partly consists of the wages of machine-makers, iron-founders, and miners. And to these must be added the wages of the carriers who transported any of the means and appliances of the production to the place where they were to be used, and the product itself to the place where it is to be sold.

Confirmation is here given, in the above words, of the opinion that, in Mr. Mill's mind, Cost of Production was looked at wholly from the stand-point of the capitalist, and was identical with Cost of Labor to the capitalist.

The value of commodities, therefore, depends principally (we shall presently see whether it depends solely) on the quantity of labor required for their production, including in the idea of production that of conveyance to the market. But since the cost of production to the capitalist is not labor but wages, and since wages may be either greater or less, the quantity of labor being the same, it would seem that the value of the product can not be determined solely by the quantity of labor, but by the quantity together with the remuneration, and that values must partly depend on wages.

Now the relation of one thing to another can not be altered by any cause which affects them both alike. A rise or fall of general wages is a fact which affects all commodities in the same manner, and therefore affords no reason why they should exchange for each other in one rather than in another proportion. Though there is no such thing as a general rise of values, there is such a thing as a general rise of prices. As soon as we form distinctly the idea of values, we see that high or low wages can have nothing to do with them; but that high wages make high prices, is a popular and widely spread opinion. The whole amount of error involved in this proposition can only be seen thoroughly when we come to the theory of money; at present we need only say that if it be true, there can be no such thing as a real rise of wages; for if wages could not rise without a proportional rise of the price of everything, they could not, for any substantial purpose, rise at all. It must be remembered, too, that general high prices, even supposing them to exist, can be of no use to a producer or dealer, considered as such; for, if they increase his money returns, they increase in the same degree all his expenses. There is no mode in which capitalists can compensate themselves for a high cost of labor, through any action on values or prices. It can not be prevented from taking its effect in low profits. If the laborers really get more, that is, get the produce of more labor, a smaller percentage must remain for profit.



2. Wages affect Values, only if different in different employments; "non-competing groups."

Although, however, general wages, whether high or low, do not affect values, yet if wages are higher in one employment than another, or if they rise or fall permanently in one employment without doing so in others, these inequalities do really operate upon values. Things, for example, which are made by skilled labor, exchange for the produce of a much greater quantity of unskilled labor, for no reason but because the labor is more highly paid. We have before remarked that the difficulty of passing from one class of employments to a class greatly superior has hitherto caused the wages of all those classes of laborers who are separated from one another by any very marked barrier to depend more than might be supposed upon the increase of the population of each class considered separately, and that the inequalities in the remuneration of labor are much greater than could exist if the competition of the laboring people generally could be brought practically to bear on each particular employment. It follows from this that wages in different employments do not rise or fall simultaneously, but are, for short and sometimes even for long periods, nearly independent of one another. All such disparities evidently alter the relative cost of production of different commodities, and will therefore be completely represented in their natural or average value.

This is again a clear recognition of the influence of Mr. Cairnes's theory of "non-competing groups."(215)

Wages do enter into value. The relative wages of the labor necessary for producing different commodities affect their value just as much as the relative quantities of labor. It is true, the absolute wages paid have no effect upon values; but neither has the absolute quantity of labor. If that were to vary simultaneously and equally in all commodities, values would not be affected. If, for instance, the general efficiency of all labor were increased, so that all things without exception could be produced in the same quantity as before with a smaller amount of labor, no trace of this general diminution of cost of production would show itself in the values of commodities.



3. Profits an element in Cost of Production.

Thus far of labor or wages as an element in cost of production. But in our analysis, in the First Book, of the requisites of production, we found that there is another necessary element in it besides labor. There is also capital; and this being the result of abstinence, the produce, or its value, must be sufficient to remunerate, not only all the labor required, but the abstinence of all the persons by whom the remuneration of the different classes of laborers was advanced. The return from abstinence is Profit. And profit, we have also seen, is not exclusively the surplus remaining to the capitalist after he has been compensated for his outlay, but forms, in most cases, no unimportant part of the outlay itself. The flax-spinner, part of whose expenses consists of the purchase of flax and of machinery, has had to pay, in their price, not only the wages of the labor by which the flax was grown and the machinery made, but the profits of the grower, the flax-dresser, the miner, the iron-founder, and the machine-maker. All these profits, together with those of the spinner himself, were again advanced by the weaver, in the price of his material—linen yarn; and along with them the profits of a fresh set of machine-makers, and of the miners and iron-workers who supplied them with their metallic material. All these advances form part of the cost of production of linen. Profits, therefore, as well as wages, enter into the cost of production which determines the value of the produce.



4. Cost of Production properly represented by sacrifice, or cost, to the Laborer as well as to the Capitalist; the relation of this conception to the Cost of Labor.

In discussing Cost of Labor (supra, pp. 225, 226), Mr. Mill found that the advances of the immediate producer consisted not only of wages, but also of tools, materials, etc., in the price of which he was including the profits of an auxiliary capitalist who advanced the capital for making these tools, etc. But, then, if a line of division were to be passed down through all these advances, separating wages from profits, he urged that, if all the capitalists (auxiliary and immediate both) were one, all the advances of the capitalist might be considered as wages. Profits did not form a part of the outlay to the capitalists in the former analysis. And this seems correct enough. Now, however, he suggests that the outlay of the immediate producers should include the profit of the auxiliary capitalist. More than this, Mr. Mill now includes in cost to the capitalist the profit of the immediate capitalist. For example, in his illustration of the manufacture of linen, he includes not merely the profit of the auxiliary capital engaged in spinning and weaving, but the profit of the immediate and last capitalist, the linen-manufacturer, also. This includes in the cost of producing an article a profit not realized until after the commodity is produced.

It is now time to give a more correct idea of cost of production. Every one admits, for example, that the "cost of production" of wheat is less in the United States than in England. If, for instance, three men with a capital of one hundred dollars may on a plot of ground, A, in the United States produce one hundred bushels of wheat, it will happen that the same men and capital will only produce sixty bushels on ground, B, in England.



In ordinary language, then, we say that the cost of production is greater in England than in the United States, because the same labor and capital here produce one hundred bushels for sixty in England; or, what amounts to the same thing, that less labor and capital could produce sixty bushels in the United States than sixty bushels in England. If we suppose that one fourth of the crop is profit, and three fourths is assigned to wages in both countries, then in the United States the one hundred dollars of capital receives twenty-five bushels of profit, while in England it receives only fifteen; and the three men receive as wages in the United States twenty-five bushels each, while in England they receive only fifteen bushels each. The first important induction to be made is that where cost of production is low, wages and profits are high. The high productiveness of extractive industries in the United States is the reason why wages and profits are higher here than in older countries.

Now the second important question is, Is cost of production made up of wages and profits, and is it true that the cost rises with a rise of wages and profits? Certainly not. Wages and profits are both higher in the United States than in England, but no one is so absurd as to say that the cost of production of wheat (as above explained) is higher here than there. It is exactly because cost of production of wheat is lower in the United States that wages and profits measured in wheat are higher here than in England. Therefore, it can not be granted, as Mr. Mill expounds the doctrine, that cost of production is made up of wages and profits. When we speak of an increased cost of production of a given article, we mean that its production requires more labor and capital than before; and of a decrease in cost of production, that it requires less labor and capital than before; meaning by "more labor" that a given quality of labor is exerted for a longer or shorter time, and by "more capital" that a greater or less quantity of wealth abstained from is employed for a longer or shorter time; or, in other words, that laborers and capitalists undergo more or less sacrifice in exertion and abstinence, respectively, to attain a given result. This is the contribution to cost of production made by Mr. Cairnes, and briefly defined as follows: "In the case of labor, the cost of producing a given commodity will be represented by the number of average laborers employed in its production—regard at the same time being had to the severity of the work and the degree of risk it involves—multiplied by the duration of their labors. In that of abstinence, the principle is analogous; the sacrifice will be measured by the quantity of wealth abstained from, taken in connection with the risk incurred, and multiplied by the duration of the abstinence."(216)

This view of cost of production takes into consideration, in the act of production, what Mr. Mill does not include, the cost, or real sacrifice, to the laborer as well as to the capitalist. It may, then, be well to state the relations of cost of production, taken in this better sense, to value.

Within competing groups, where there is free choice for labor and capital to select the most remunerative occupations, the hardest and most disagreeable employments will be best paid, and the wages and profits will be in proportion to the sacrifice involved in each case. If so, the amount paid in wages and profits represents the sacrifices in each case. Now, the aggregate product of an industry is the source from which is drawn its wages and profits: the aggregate wages and profits, therefore, must vary with the value of the total product. If the total value depart from the sum hitherto sufficient to pay the given wages and profits, then some will be paid proportionally less than their sacrifice. The value of a commodity, therefore, within the competing group, must conform to the costs of production. If, for example (a), the value at any time were such as not to give the laborer the usual equivalent for his sacrifice, he would change his employment to another within the group where he could get it; if (b) the share of the capitalist were at any time insufficient to give him the usual reward for his abstinence, he would change the investment of his capital. Therefore, within such limits as allow a free competition of labor and capital, value must conform itself to cost of production.

Not so, however, with the products of non-competing industrial groups. As shown by Mr. Mill, labor does not pass freely from one employment to another; and it must be said that capital does not either, although vastly more ready to move than labor. In a large and thinly settled country capital does not move freely over the whole area of industry; if it did, different rates of profit would not prevail, as we all know they do, in the United States. Now, as before stated, the total value of the commodities resulting from the exertions of each group of producers is the source from which wages and profits are drawn. The aggregate wages and profits in each industry will vary with the value of the aggregate products. But this total value depends upon what it will exchange for of the products of other groups; that is, this value depends on the reciprocal demand of one group for the commodities of the other groups, as compared with the demand of the other groups for its products. For example, although cost of production is low in group A, if the demand from outside groups were to be strong, the exchange value of A's products would rise, and A would get more of other goods in exchange; that is, the total produce is large, but a second increment, arising from a higher exchange value, is to be shared among A's laborers and capitalists. A few years ago, about 1878-1879, the value of wheat in the United States rose because of the increased demand from Europe, where the harvests had been unusually deficient. There had been no falling off in the productiveness of the farming industry of the United States to cause the increased price; but the relative demand of other industrial groups for wheat, the product of the farming industry, raised the exchange value of wheat, and so increased the industrial rewards of those engaged as laborers and capitalists in farming. So it is to be concluded that since there is no free movement of labor and capital between non-competing groups, wages and profits may constantly remain at rates which are not in correspondence with the actual sacrifice, or cost, to labor and capital in different groups; hence, their products do not exchange for each other in proportion to their costs of production. Reciprocal demand is the law of their value.

It will be said, at once, that the foregoing conception of cost of production is entirely opposed to the language of practical men of affairs. They constantly speak of higher or lower wages as increasing their cost of production, or as affecting their ability to compete with foreigners. So universal a usage implies a foundation of truth which demands attention. Wages do represent cost to the capitalist, that is, the chief part of the outlay he makes in order to get a given return; but we have already seen this, and, in the language of Political Economy, termed it "cost of labor" to the capitalist. When the business world use the phrase cost of production, they use it in the sense of cost of labor, as hitherto explained. When they are obliged by strikers to pay more wages, they say that it increases their "cost of production," meaning the cost to them of getting their product, and that it affects their profits. This, then, will show that there is no objection to be urged, in its true sense, against the phrase cost of production, arising from its misuse in the common language of business.

The real connection between the proper conception of cost of production and cost of labor is, however, worth attention. It touches cost of labor through that one of its elements called "efficiency of labor." The more productive an industry is, the higher its wages and profits may be, and it is exactly at this point that more attention should be given to the relations of labor and capital. If productiveness can be increased, higher wages as well as higher profits are possible. The proper understanding of the idea that where cost of production is low wages and profits are high, throws a flood of light on many industrial questions in the United States. In the connection in which it stands, as I have shown, to cost of labor, it means that if commodities can be produced at a less sacrifice to labor and capital by the use of machinery and new processes, higher wages are consistent with a lower price of the given product. It explains the fact that, owing to skill or natural resources, labor, although paid much higher rates, can produce articles cheaper than laborers who are less highly paid. Mr. Brassey(217) has pointed out that English wages are higher than on the Continent; and yet England, through low cost of production, owing to skill, natural resources, etc., can produce so much more of commodities for a given outlay that (while keeping her usual rate of profit) she can generally undersell her competitors who employ cheaper labor. The same observations apply to the United States; but the question of foreign competition will be further discussed (Book III, Chap. XX) after we have studied international trade and values.

"And here it may be well to state precisely what is to be understood by a 'fluctuation of the market,' as distinguished from those changes of normal price which we have been considering. Normal price, as we have seen, is governed, according to the circumstances of the case [as to whether there is free industrial competition or not], by one or other of two causes—cost of production and reciprocal demand. A change in normal price, therefore, is a change which is the consequence of an alteration in one or other of these conditions. So long as the determining condition—be it cost of production or reciprocal demand—remains constant, the normal price must be considered as remaining constant; but, the normal price remaining constant, the market price (which, as we have seen, depends on the opinion of dealers respecting the state of supply and demand in relation to the particular article) may undergo a change—may deviate, that is to say, either upward or downward from the normal level. Such changes of price, occurring while the permanent conditions of production remain unaffected, can only be temporary, calling into action, as they do, forces which at once tend to restore the normal state of things: they may therefore be properly described as 'fluctuations of the market.' "(218)



5. When profits vary from Employment to Employment, or are spread over unequal lengths of Time, they affect Values accordingly.

Value, however, being purely relative, can not depend upon absolute profits, no more than upon absolute wages, but upon relative profits only. High general profits can not, any more than high general wages, be a cause of high values, because high general values are an absurdity and a contradiction. In so far as profits enter into the cost of production of all things, they can not affect the value of any. It is only by entering in a greater degree into the cost of production of some things than of others, that they can have any influence on value.

Profits, however, may enter more largely into the conditions of production of one commodity than of another, even though there be no difference in the rate of profit between the two employments. The one commodity may be called upon to yield a profit during a longer period of time than the other. The example by which this case is usually illustrated is that of wine. Suppose a quantity of wine and a quantity of cloth, made by equal amounts of labor, and that labor paid at the same rate. The cloth does not improve by keeping; the wine does. Suppose that, to attain the desired quality, the wine requires to be kept five years. The producer or dealer will not keep it, unless at the end of five years he can sell it for as much more than the cloth as amounts to five years' profit, accumulated at compound interest. The wine and the cloth were made by the same original outlay. Here, then, is a case in which the natural values, relatively to one another, of two commodities, do not conform to their cost of production alone, but to their cost of production plus something else—unless, indeed, for the sake of generality in the expression, we include the profit which the wine-merchant foregoes during the five years, in the cost of production of the wine, looking upon it as a kind of additional outlay, over and above his other advances, for which outlay he must be indemnified at last.

Regarding cost of production as the amounts of labor and abstinence required in production, and not as Mr. Mill regards it, as the amounts of wages and profits, the above is simply a case where, in the production of wine, there is a longer duration of the abstinence than in the production of cloth. If there is a free movement of labor and capital between the two industries, they will exchange for each other in proportion to the sacrifices involved; so that the wine would exchange for more of cloth, because there was more sacrifice undergone. The same explanation also holds good in the following illustration:

All commodities made by machinery are assimilated, at least approximately, to the wine in the preceding example. In comparison with things made wholly by immediate labor, profits enter more largely into their cost of production. Suppose two commodities, A and B, each requiring a year for its production, by means of a capital which we will on this occasion denote by money, and suppose it to be L1,000. A is made wholly by immediate labor, the whole L1,000 being expended directly in wages. B is made by means of labor which cost L500 and a machine which cost L500, and the machine is worn out by one year's use. The two commodities will be of exactly the same value, which, if computed in money, and if profits are 20 per cent per annum, will be L1,200. But of this L1,200, in the case of A, only L200, or one sixth, is profit; while in the case of B there is not only the L200, but as much of L500 (the price of the machine) as consisted of the profits of the machine-maker; which, if we suppose the machine also to have taken a year for its production, is again one sixth. So that in the case of A only one sixth of the entire return is profit, while in B the element of profit comprises not only a sixth of the whole, but an additional sixth of a large part.