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CHAPTER IV: ultimate analysis of cost of production - John Stuart Mill, Principles of Political Economy with some of their Applications to Social Philosophy (Ashley ed.) 
Principles of Political Economy with some of their Applications to Social Philosophy, ed. William James Ashley (London: Longmans, Green and Co., 1909, 7th ed.).
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ultimate analysis of cost of production
§ 1. The component elements of Cost of Production have been set forth in the First Part of this enquiry.∗ The principal of them, and so much the principal as to be nearly the sole, we found to be Labour. What the production of a thing costs to its producer, or its series of producers, is the labour expended in producing it. If we consider as the producer the capitalist who makes the advances, the word Labour may be replaced by the word Wages: what the produce costs to him, is the wages which he has had to pay. At the first glance indeed this seems to be only a part of his outlay, since he has not only paid wages to labourers, but has likewise provided them with tools, materials, and perhaps buildings. These tools, materials, and buildings, however, were produced by labour 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 labour. 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 woolcombers, 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 brickmakers, 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.
The value of commodities, therefore, depends principally (we shall presently see whether it depends solely) on the quantity of labour required for their production; including in the idea of production, that of conveyance to the market. “In estimating,” says Ricardo,∗ “the exchangeable value of stockings, for example, we shall find that their value, comparatively with other things, depends on the total quantity of labour necessary to manufacture them and bring them to market. First, there is the labour necessary to cultivate the land on which the raw cotton is grown; secondly, the labour of conveying the cotton to the country where the stockings are to be manufactured, which includes a portion of the labour bestowed in building the ship in which it is conveyed, and which is charged in the freight of the goods; thirdly, the labour of the spinner and weaver; fourthly, a portion of the labour of the engineer, smith, and carpenter, who erected the buildings and machinery by the help of which they are made; fifthly, the labour of the retail dealer and of many others, whom it is unnecessary further to particularize. The aggregate sum of these various kinds of labour, determines the quantity of other things for which these stockings will exchange, while the same consideration of the various quantities of labour which have been bestowed on those other things, will equally govern the portion of them which will be given for the stockings.
“To convince ourselves that this is the real foundation of exchangeable value, let us suppose any improvement to be made in the means of abridging labour in any one of the various processes through which the raw cotton must pass before the manufactured stockings come to the market to be exchanged for other things; and observe the effects which will follow. If fewer men were required to cultivate the raw cotton, or if fewer sailors were employed in navigating, or shipwrights in constructing, the ship in which it was conveyed to us; if fewer hands were employed in raising the buildings and machinery, or if these, when raised, were rendered more efficient; the stockings would inevitably fall in value, and command less of other things. They would fall, because a less quantity of labour was necessary to their production, and would therefore exchange for a smaller quantity of those things in which no such abridgement of labour had been made.
“Economy in the use of labour never fails to reduce the relative value of a commodity, whether the saving be in the labour necessary to the manufacture of the commodity itself, or in that necessary to the formation of the capital, by the aid of which it is produced. In either case the price of stockings would fall, whether there were fewer men employed as bleachers, spinners, and weavers, persons immediately necessary to their manufacture: or as sailors, carriers, engineers, and smiths, persons more indirectly concerned. In the one case, the whole saving of labour would fall on the stockings, because that portion of labour was wholly confined to the stockings; in the other, a portion only would fall on the stockings, the remainder being applied to all those other commodities, to the production of which the buildings, machinery, and carriage, were subservient.”
§ 2. It will have been observed that Ricardo expresses himself as if the quantity of labour which it costs to produce a commodity and bring it to market, were the only thing on which its value depended. But since the cost of production to the capitalist is not labour but wages, and since wages may be either greater or less, the quantity of labour being the same; it would seem that the value of the product cannot be determined solely by the quantity of labour, but by the quantity together with the remuneration; and that values must partly depend on wages.
In order to decide this point, it must be considered, that value is a relative term: that the value of a commodity is not a name for an inherent and substantive quality of the thing itself, but means the quantity of other things which can be obtained in exchange for it. The value of one thing must always be understood relatively to some other thing, or to things in general. Now the relation of one thing to another cannot 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. To suppose that high wages make high values, is to suppose that there can be such a thing as general high values. But this is a contradiction in terms: the high value of some things is synonymous with the low value of others. The mistake arises from not attending to values, but only to prices. 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. This surely is a sufficient reductio ad absurdum, and shows the amazing folly of the propositions which may and do become, and long remain, accredited doctrines of popular political economy. 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 labour, through any action on values or prices. It cannot be prevented from taking its effect on low profits. If the labourers really get more, that is, get the produce of more labour, a smaller percentage must remain for profit. From this Law of Distribution, resting as it does on a law of arithmetic, there is no escape. The mechanism of Exchange and Price may hide it from us, but is quite powerless to alter it.
§ 3. 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 and fall permanently in one employment without doing so in others, these inequalities do really operate upon values. The causes which make wages vary from one employment to another, have been considered in a former chapter. When the wages of an employment permanently exceed the average rate, the value of the thing produced will, in the same degree, exceed the standard determined by mere quantity of labour. Things, for example, which are made by skilled labour, exchange for the produce of a much greater quantity of unskilled labour; for no reason but because the labour is more highly paid. If, through the extension of education, the labourers competent to skilled employments were so increased in number as to diminish the difference between their wages and those of common labour, all things produced by labour of the superior kind would fall in value, compared with things produced by common labour, and these might be said therefore to rise in value. 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 labourers 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 labour are much greater than could exist if the competition of the labouring 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 costs of production of different commodities, and will therefore be completely represented in their natural or average value.
It thus appears that the maxim laid down by some of the best political economists, that wages do not enter into value, is expressed with greater latitude than the truth warrants, or than accords with their own meaning. Wages do enter into value. The relative wages of the labour necessary for producing different commodities, affect their value just as much as the relative quantities of labour. It is true, the absolute wages paid have no effect upon values; but neither has the absolute quantity of labour. If that were to vary simultaneously and equally in all commodities, values would not be affected. If, for instance, the general efficiency of all labour were increased, so that all things without exception could be produced in the same quantity as before with a smaller amount of labour, no trace of this general diminution of cost of production would show itself in the values of commodities. Any change which might take place in them would only represent the unequal degrees in which the improvement affected different things; and would consist in cheapening those in which the saving of labour had been the greatest, while those in which there had been some, but a less saving of labour, would actually rise in value. In strictness, therefore, wages of labour have as much to do with value as quantity of labour: and neither Ricardo nor any one else has denied the fact. In considering, however, the causes of variations in value, quantity of labour is the thing of chief importance; for when that varies, it is generally in one or a few commodities at a time, but the variations of wages (except passing fluctuations) are usually general, and have no considerable effect on value.
§ 4. Thus far of labour, 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 labour. 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 labour required, but the abstinence of all the persons by whom the remuneration of the different classes of labourers was advanced. The return for 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 labour 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 profit 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.
Value, however, being purely relative, cannot depend upon absolute profit, no more than upon absolute wages, but upon relative profits only. High general profits cannot, 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 cannot 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.
For example, we have seen that there are causes which necessitate a permanently higher rate of profit in certain employments than in others. There must be a compensation for superior risk, trouble, and disagreeableness. This can only be obtained by selling the commodity at a value above that which is due to the quantity of labour necessary for its production. If gunpowder exchanged for other things in no higher ratio than that of the labour required from first to last for producing it, no one would set up a powder-mill. Butchers are certainly a more prosperous class than bakers, and do not seem to be exposed to greater risks, since it is not remarked that they are oftener bankrupts. They seem, therefore, to obtain higher profits, which can only arise from the more limited competition caused by the unpleasantness, and to a certain degree, the unpopularity, of their trade. But this higher profit implies that they sell their commodity at a higher value than that due to their labour and outlay. All inequalities of profit which are necessary and permanent, are represented in the relative values of the commodities.
§ 5. 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 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 labour, and that labour 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.
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 labour, 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 to be 1000l. A is made wholly by immediate labour, the whole 1000l. being expended directly in wages. B is made by means of labour which costs 500l. and a machine which cost 500l., and the machine is worn out by one year’s use. The two commodities will be exactly of the same value; which, if computed in money, and if profits are 20 per cent per annum, will be 1200l. But of this 1200l., in the case of A, only 200l., or one-sixth, is profit: while in the case of B there is not only the 200l., but as much of 500l. (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, whilst in B the element of profit comprises not only a sixth of the whole, but an additional sixth of a large part.
The greater the proportion of the whole capital which consists of machinery, or buildings, or material, or anything else which must be provided before the immediate labour can commence, the more largely will profits enter into the cost of production. It is equally true, though not so obvious at first sight, that greater durability in the portion of capital which consists of machinery or buildings, has precisely the same effect as a greater amount of it. As we just supposed one extreme case, of a machine entirely worn out by a year’s use, let us now suppose the opposite and still more extreme case of a machine which lasts for ever, and requires no repairs. In this case, which is as well suited for the purpose of illustration as if it were a possible one, it will be unnecessary that the manufacturer should ever be repaid the 500l. which he gave for the machine, since he has always the machine itself, worth 500l.; but he must be paid, as before, a profit on it. The commodity B, therefore, which in the case previously supposed was sold for 1200l. of which sum 1000l. were to replace the capital and 200l. were profit, can now be sold for 700l., being 500l. to replace wages, and 200l. profit on the entire capital. Profit, therefore, enters into the value of B in the ratio of 200l. out of 700l., being two-sevenths of the whole, or 28 4/7 per cent, while in the case of A, as before, it enters only in the ratio of one-sixth, or 16 2/3 per cent. The case is of course purely ideal, since no machinery or other fixed capital lasts for ever; but the more durable it is, the nearer it approaches to this ideal case, and the more largely does profit enter into the return. If, for instance, a machine worth 500l. loses one-fifth of its value by each year’s use, 100l. must be added to the return to make up this loss, and the price of the commodity will be 800l. Profit therefore will enter into it in the ratio of 200l. to 800l., or one-fourth, which is still a much higher proportion than one-sixth, or 200l. in 1200l., as in case A.
From the unequal proportion in which, in different employments, profits enter into the advances of the capitalist, and therefore into the returns required by him, two consequences follow in regard to value. One is, that commodities do not exchange in the ratio simply of the quantities of labour required to produce them; not even if we allow for the unequal rates at which different kinds of labour are permanently remunerated. We have already illustrated this by the example of wine: we shall now further exemplify it by the case of commodities made by machinery. Suppose, as before, an article A made by a thousand pounds' worth of immediate labour. But instead of B, made by 500l. worth of immediate labour and a machine worth 500l., let us suppose C, made by 500l. worth of immediate labour with the aid of a machine which has been produced by another 500l. worth of immediate labour: the machine requiring a year for making, and worn out by a year’s use; profits being as before 20 per cent. A and C are made by equal quantities of labour, paid at the same rate: A costs 1000l. worth of direct labour; C, only 500l. worth, which however is made up to 1000l. by the labour expended in the construction of the machine. If labour, or its remuneration, were the sole ingredient of cost of production, these two things would exchange for one another. But will they do so? Certainly not. The machine having been made in a year by an outlay of 500l., and profits being 20 per cent, the natural price of the machine is 600l.: making an additional 100l. which must be advanced, over and above his other expenses, by the manufacturer of C, and repaid to him with a profit of 20 per cent. While, therefore, the commodity A is sold for 1200l., C cannot be permanently sold for less than 1320l.
A second consequence is, that every rise or fall of general profits will have an effect on values. Not indeed by raising or lowering them generally, (which, as we have so often said, is a contradiction and an impossibility): but by altering the proportion in which the values of things are affected by the unequal lengths of time for which profit is due. When two things, though made by equal labour, are of unequal value because the one is called upon to yield profit for a greater number of years or months than the other; this difference of value will be greater when profits are greater, and less when they are less. The wine which has to yield five years' profit more than the cloth, will surpass it in value much more if profits are 40 per cent, than if they are only 20. The commodities A and C, which, though made by equal quantities of labour, were sold for 1200l. and 1320l., a difference of 10 per cent, would, if profits had been only half as much, have been sold for 1100l. and 1155l., a difference of only 5 per cent.
It follows from this, that even a general rise of wages, when it involves a real increase in the cost of labour, does in some degree influence values. It does not affect them in the manner vulgarly supposed, by raising them universally. But an increase in the cost of labour, lowers profits; and therefore lowers in natural value the things into which profits enter in a greater proportion than the average, and raises those into which they enter in a less proportion than the average. All commodities in the production of which machinery bears a large part, especially if the machinery is very durable, are lowered in their relative value when profits fall; or, what is equivalent, other things are raised in value relatively to them. This truth is sometimes expressed in a phraseology more plausible than sound, by saying that a rise of wages raises the value of things made by labour, in comparison with those made by machinery. But things made by machinery, just as much as any other things, are made by labour, namely, the labour which made the machinery itself: the only difference being that profits enter somewhat more largely into the production of things for which machinery is used, though the principal item of the outlay is still labour. It is better, therefore, to associate the effect with fall of profits than with rise of wages; especially as this last expression is extremely ambiguous, suggesting the idea of an increase of the labourer’s real remuneration, rather than of what is alone to the purpose here, namely, the cost of labour to its employer.
§ 6. Besides the natural and necessary elements in cost of production—labour and profits—there are others which are artificial and casual, as for instance a tax. The tax on malt is as much a part of the cost of production of that article as the wages of the labourers. The expenses which the law imposes, as well as those which the nature of things imposes, must be reimbursed with the ordinary profit from the value of the produce, or the things will not continue to be produced. But the influence of taxation on value is subject to the same conditions as the influence of wages and of profits. It is not general taxation, but differential taxation, that produces the effect. If all productions were taxed so as to take an equal percentage from all profits, relative values would be in no way disturbed. If only a few commodities were taxed, their value would rise: and if only a few were left untaxed, their value would fall. If half were taxed and the remainder untaxed, the first half would rise and the last would fall relatively to each other. This would be necessary in order to equalize the expectation of profit in all employments, without which the taxed employments would ultimately, if not immediately, be abandoned. But general taxation, when equally imposed, and not disturbing the relations of different productions to one another, cannot produce any effect on values.
We have thus far supposed that all the means and appliances which enter into the cost of production of commodities, are things whose own value depends on their cost of production. Some of them, however, may belong to the class of things which cannot be increased ad libitum in quantity, and which therefore, if the demand goes beyond a certain amount, command a scarcity value. The materials of many of the ornamental articles manufactured in Italy are the substances called rosso, giallo, and verde antico, which, whether truly or falsely I know not, are asserted to be solely derived from the destruction of ancient columns and other ornamental structures; the quarries from which the stone was originally cut being exhausted, or their locality forgotten.∗ A material of such a nature, if in much demand, must be at a scarcity value; and this value enters into the cost of production, and consequently into the value, of the finished article. The time seems to be approaching when the more valuable furs will come under the influence of a scarcity value of the material. Hitherto the diminishing number of the animals which produce them, in the wildernesses of Siberia, and on the coasts of the Esquimaux Sea, has operated on the value only through the greater labour which has become necessary for securing any given quantity of the article, since, without doubt, by employing labour enough, it might still be obtained in much greater abundance for some time longer.
But the case in which scarcity value chiefly operates in adding to cost of production, is the case of natural agents. These, when unappropriated, and to be had for the taking, do not enter into cost of production, save to the extent of the labour which may be necessary to fit them for use. Even when appropriated, they do not (as we have already seen) bear a value from the mere fact of the appropriation, but only from scarcity, that is, from limitation of supply. But it is equally certain that they often do bear a scarcity value. Suppose a fall of water, in a place where there are more mills wanted than there is water-power to supply them; the use of the fall of water will have a scarcity value, sufficient either to bring the demand down to the supply, or to pay for the creation of an artificial power, by steam or otherwise, equal in efficiency to the water-power.
A natural agent being a possession in perpetuity, and being only serviceable by the products resulting from its continued employment, the ordinary mode of deriving benefit from its ownership is by an annual equivalent, paid by the person who uses it, from the proceeds of its use. This equivalent always might be, and generally is, termed rent. The question, therefore, respecting the influence which the appropriation of natural agents produces on values, is often stated in this form: Does Rent enter into Cost of Production? and the answer of the best political economists is in the negative. The temptation is strong to the adoption of these sweeping expressions, even by those who are aware of the restrictions with which they must be taken; for there is no denying that they stamp a general principle more firmly on the mind, than if it were hedged round in theory with all its practical limitations. But they also puzzle and mislead, and create an impression unfavourable to political economy, as if it disregarded the evidence of facts. No one can deny that rent sometimes enters into cost of production. If I buy or rent a piece of ground, and build a cloth manufactory on it, the ground-rent forms legitimately a part of my expenses of production, which must be repaid by the product. And since all factories are built on ground, and most of them in places where ground is peculiarly valuable, the rent paid for it must, on the average, be compensated in the values of all things made in factories. In what sense it is true that rent does not enter into the cost of production or affect the value of agricultural produce, will be shown in the succeeding chapter.
[∗]Supra, pp. 29–31.
[∗]Principles of Political Economy and Taxation, ch. i. sect. 3.
[∗] Some of these quarries, I believe, have been rediscovered, and are again worked.