The Online Library of Liberty

A project of Liberty Fund, Inc.

• Preface.
• Lecture I.
• Lecture II.
• Lecture III.
• Lecture IV.
• Lecture V.
• Lecture VI.
• Lecture VII.
• Lecture VIII.
• Lecture IX.
• Lecture X.
• Lecture XI.
• Appendix.
• Note On Page 32.
• Page 37.
• Page 39.
• Page 57.
• Page 65.
• Page 133.
• Page 145.
• Page 149.
• Page 164.
• Page 175.
• Page 183.
• Page 203.
• Page 223.

LECTURE III.

Gentlemen,—

Having attempted to explain what value is, and how it may be measured, I shall proceed to call your attention to the circumstances which gave rise to its existence, and by their variations influence and regulate its amount. I felt it necessary to occupy some of your time in endeavouring to prove that labour, although frequently a useful and convenient measure of value, is not on that account to be considered the only real one. It is a convenient measure because it admits of being directly compared with all important commodities, but the arguments employed to prove it the only real measure are I think entirely inconsistent with every notion that we are accustomed to entertain of the meaning of the term value. The common argument is thus briefly stated by Mr M‘Culloch, in his Principles of Political-Economy, page 297: “But however the same quantity of labour may be laid out, and whatever may be its produce, it unavoidably occasions the same sacrifice to those by whom it is performed; and hence it is plain that the products of equal quantities of labour or of toil and trouble must, how much soever they may differ in magnitude, always be of precisely the same real value.” Now real value in this proposition can have no reference to its utility or exchangeable powers. The proposition, if true, is a trifling one, obtained by a mere comparison of the definition with the thing defined.

Labour is sometimes defended as the best measure of value, as being thought the most invariable one in different ages or countries; but even this is a proposition assumed upon very slender foundations. A man whose annual income 400 years ago amounted to a certain quantity of gold or silver bullion, would indeed possess a different share of the luxuries, conveniences, and necessaries of life from that of the man who enjoyed the same income, measured in the same manner, in the present day. But equally different would be the shares possessed by two men, one of the present age and one who lived 400 years ago, if their incomes were equal, when measured by the quantities of labour they could command or purchase. The same quantity of labour will not, in different ages or countries, produce or purchase the same amount of the luxuries, comforts, or necessaries of life. Labour therefore is not a “real,” in the sense of being an invariable, measure of value. Indeed it is utterly impossible that there can exist any invariable measure of value as long as the prices of different commodities vary in relation to each other.

To investigate with success the circumstances which regulate value, we must consider what it is that gives rise to exchanges. However useful, or even necessary to the subsistence of man, any commodity may be, there is a limit to the quantity of it which any individual can consume, and the love or necessity of variety will induce him to part with all that he possesses beyond a certain share, if by parting with it he can procure any thing which can contribute more to his enjoyments. And by a wise provision of nature, the more indispensable any commodity is to human subsistence or happiness, the more strict and absolute is the limit within which our consumption of it is confined. The most natural and most urgent of our appetites are those which can be the soonest and most certainly satisfied. Those which in their extent are the most insatiable, can be repressed or denied without any diminution to our happiness. By this provision the riches of the wealthy are prevented from interfering with the maintenance of the poor. The richest individual, whatever quantity of corn or other food he may possess or be able to purchase, is not able to consume more than the poor man. His wealth may enable him to command the labour of the poor, but he cannot himself consume the provisions intended by Providence for their subsistence, since the energy with which nature rejects all beyond a certain quantity is always proportional to the importunity with which she demands that portion. And the nature and reason of man leading him to exchanges, he will dispose of that surplus which he cannot use himself to some one who in exchange for it can give him something that may contribute to his enjoyment. Its power of serving others will not induce him to keep it, although it may enable him to procure a higher price for it from some one who can use it.

Thus in an exchange there must be two persons and at least two things concerned; that portion of any commodity which any one possesses and does not intend to consume is called the supply; the disposition to give something in exchange for it may be called the demand. An exchange of equivalents is advantageous to both parties, since each procures by means of it something which he considers to be of more use to himself, under his circumstances, than the article which he parts with.

The rules which regulate the relative values of commodities are simple, and may be considered as the consequence of this general law, which is not subject to many exceptions—namely, that every person is desirous to get as much as he can for the goods of which he disposes. This leads every man to buy as cheap, and to sell as dear as he can. The law of mutual competition does the rest.

In all civilized societies, goods are exchanged for money or sold, by those who dispose of the supply to the consumer, and are procured in exchange for money, by those who require them. It is with money that all commodities are compared by those who deal in them, as it is on their money prices that their profit or loss depends; if the seller demands more than a certain sum for his goods, others will undersell him, finding it more to their advantage to dispose of their goods, though at a lower price, than to retain them in their possession unsold; and in this manner, mutual competition will compel the former to sell his goods at a more reasonable price. But this reduction evidently has its limits; if the cheapness is such as to increase the number of buyers to an amount more than sufficient to take off the whole supply, the mutual competition of buyers, each anxious to procure an article, of which, on the supposition there is not enough for all, will increase the price to the highest sum that is consistent with the entire supply being disposed of. Thus there is a certain sum to which the market price of any article has a constant tendency to conform itself; namely, that price which will exactly adjust the supply to the effective demand. The entire supply could not be disposed of at a higher price, some share should remain unsold, to the injury of the person in whose hands it is left. Every seller is anxious that this loss should not fall upon himself, and thus mutual competition will lower the price of the commodity. In the same manner, the competition among the buyers will prevent the price from sinking too low; and the seller will have no inducement to reduce the price of his goods below the highest price which is consistent with his disposing of his entire stock.

Besides this adjustment between the supply and the demand, the cost of production or natural value of any commodity always exercises a very considerable influence upon its price. The cost of production regulates the supply, and keeps it pretty nearly in that proportion to the demand which may produce a conformity between the exchangeable and the natural value. In some articles this tendency of the market price to conform to the cost of production is so strong, that a difference between them can only be produced by a very considerable and accidental disproportion between the demand and the supply. If the cost of production or natural value of an article is ten shillings, that may be considered the price at which the article is offered by the manufacturer to the public; but if more persons are willing to purchase the article at that price than the quantity on sale can supply, some of them, rather than want the article, will offer a little more, and the competition among the buyers will raise the article to such a price that the supply will become equal to the effective demand—that is, to the demand of those who are willing to give for it the increased price to which it is raised. This equality between the effective demand and the supply is in such case produced, not by an increase of the supply, but by a diminution of the effective demand consequent upon an increase of price, which will prevent some from consuming such quantities of it as they would otherwise have been able to procure. This increase of price will be in proportion to the deficiency of the supply as compared with the demand, and to the inconvenience or difficulty of remaining without the article for any period, or of procuring a substitute for it, and to the length of time required to produce an additional supply. The producer gains an advantage by this increase of price, and the public sustains an inconvenience, some by being compelled to dispense with the use of an article of comfort or convenience, and others by being obliged to pay a higher price for it. But this advantage gained by the producer will never lead him to keep the market inadequately supplied. For when such a deficiency occurs, the profit derived from it by each individual producer is in proportion to the quantity he has to dispose of. In other words, the profit which he derives from this public inconvenience is exactly proportional to the exertions he has made to prevent it from taking place. On the other hand, if the quantity of the article to be sold is more than sufficient to supply all those who are willing to pay the natural price for it, the competition among the sellers, each being unwilling that the portion belonging to himself should remain unsold, will sink the price until the supply becomes equal to the effective demand, that is, to the demand of those who are willing to pay the reduced price for it. In this case the equality between the demand and the supply is produced not by diminishing the supply, but by the increased demand consequent upon a diminution of price. This diminution of price will be in proportion to the excess of supply as compared with the demand, to the strictness of the limits within which man’s consumption of the article is confined, to the necessity under which the producers are of disposing of it within a limited period, to the expense or difficulty of keeping and storing it without injury, and to the length of time required to produce the next supply. In this manner, by a rise or fall in price the supply is always kept in a due proportion to the demand.

In manufactured goods the tendency of the exchangeable value or price to conform to the natural value is very strong, and a considerable disproportion between the demand and supply will frequently exercise little if any influence over the price. If the supply is for a short time in excess, the retailers may abate a little of their usual profits, but they will not readily sell their goods at an absolute loss. If the article is one the demand for which arises rather from necessity than from fluctuating fashion, they will find it more to their advantage to retain a part of their stock unsold, than to sell it at a lower price than that which they will have to pay to the manufacturer for the succeeding stock. In the same manner the manufacturer, when he finds a difficulty in disposing of his goods, will keep some of them rather than sell them at a lower price than it will cost him to replace them by manufacturing. In this manner a temporary derangement of the usual proportion between the demand and the supply is prevented from exercising any considerable influence over the price of manufactured articles, and any such derangement can be only temporary, as manufacturers will not continue to produce goods which they are unable to dispose of, or can only dispose of at a loss. This prevents any considerable fall of price; and a great increase of price cannot take place, since the consumer can in general wait until a new supply comes in. Thus in manufactures the cost of production exercises a double influence over the market price, both by producing an equality between the average supply and demand, and by preventing any temporary derangement of this equality from producing any considerable increase or diminution of price. It is in raw materials, and especially in food, that the greatest variations of price are found to occur. Here, in particular, all those circumstances concur which will cause a deficiency in the supply to produce the greatest effect upon the price. The use of the article cannot be dispensed with, and any considerable reduction in the consumption of it cannot take place without much inconvenience and distress; and from the nature of the seasons a new supply cannot be raised within the country until the expiration of nearly a year; and all are willing to undergo some privations in order to obtain as nearly as possible their usual supply of food. The farmers, by selling the usual proportion of their total produce, are unable to keep the markets fully supplied. The competition among the buyers has its usual effects in raising prices, the existence of the scarcity becomes generally known, and as the farmers and dealers are aware that a new supply will not be obtained until the succeeding harvest, even the high prices do not tempt them to dispose of all their stock immediately. Many of them keep it back, waiting for still higher prices. These high prices have the effect of preventing waste or improvident consumption, and compelling many persons who cannot afford to pay them, to diminish something from their ordinary consumption of food, at the expense of some inconvenience and distress. Much suffering is endured through the country, and appeals are naturally made to the charity of the benevolent, and in some instances the interposition of the legislature is demanded in aid of the suffering poor. I shall here call your attention to some obvious and certain principles, that may be of no slight practical importance in directing either public or private charity upon such occasions. I hope, however, that the necessity for their exercise may be very far distant from the present time; and the present price of corn does not seem to indicate a scarcity. When an increase of price is produced by a scarcity of provisions, the markets are not upon that account altogether empty, nor does any very considerable deficiency appear in their daily supply. An ordinary observer would not remark a deficiency amounting to as much even as one fifth of the ordinary quantity in the market, although such a deficiency would occasion a very considerable increase of price. Every person sees that there is enough there for himself, though he does not reflect that there may not be enough for the wants of all. But as he sees more than he wants himself, and is prevented from obtaining it only by the high prices, he is not unnaturally led to complain more of the price than of the scarcity. In reality, however, high prices in such cases have the most beneficial effect in mitigating the evil consequences of a scarcity, and preventing an absolute famine from resulting towards the end of the season. They provide effectually that the reduction in the usual consumption shall be spread equally over the entire year. They do not much diminish the entire portion to be consumed by any one person or family, they only cause that portion to be given in the manner and at the times most beneficial to the consumer. To take an instance, suppose the crop of the ordinary food used in any country, as potatos in Ireland, was to fall short in some year one-sixth of the usual consumption. If this scarcity did not indicate and in some measure correct itself by an increase of price, the whole stock of provisions destined for the supply of the year would be exhausted in ten months, and for the remaining two months a scene of misery and famine beyond description would ensue. But this in fact does not take place, for prices do rise and cause an immediate diminution in the ordinary daily consumption, so that the existing stores hold out until the season for an arrival of a new supply. Undoubtedly some distress is endured during this interval, from the want felt by many of the poor of a proper quantity of food; but this distress is necessarily incident to a diminished supply, and would be incalculably increased instead of being diminished, if human legislation should attempt to regulate the prices. High prices effect the two great objects to be desired in such a case. First, they secure a provident and equable consumption of provisions during the year, instead of allowing the whole to be wasted or consumed before the year is over; and next they secure that the entire store shall be brought to market, and thus distributed for consumption within the year, and that no part of the stores in existence shall be held over from the present year when they are wanted, to the next year, when plenty may make them comparatively useless; since no one will keep his goods from the market when prices are high, to preserve them for a period of comparative plenty and cheapness. In such a year poverty is not the cause of famine or scarcity, which is in no respect to be attributed to the inequality of possessions. If all the provisions in the country were placed in a common stock, and every man allowed to take thereof freely as much as he desired to consume, they would shortly be exhausted. The same effect would take place, although not quite so speedily, if every person had money to purchase as much as he wanted; and if all the farmers and possessors of food were through benevolence to sell provisions at the accustomed prices, the poor would not be thereby relieved. The root of the distress would be left untouched. At such moderate prices the stock in the country would be insufficient to meet the demand of all who were willing to pay for it; and one of two things should happen, either that the supply of the day would be exhausted before some were able to procure any food; or if the daily supply was kept up to its usual fulness, the supply of the year would be exhausted before the next harvest came in. Dearness is therefore a salutary effect of scarcity. It mitigates the calamity by making it be felt early as an inconvenience, instead of allowing the scarcity to be concealed until a total irremediable famine should ensue. But when prices reach a certain height, an opinion frequently arises among the sufferers that it is not caused by a scarcity, and they forget that this increase of price was early apprehended and predicted. They suppose that there are provisions enough, but that the distress is caused by the insatiable rapacity of the possessors. Unwilling to admit the existence of any distress for which they cannot find somebody to blame, they flatter themselves with hopes that an appeal to the wisdom or humanity of those who govern them may be successful in rescuing them from the horror of famine. As it is difficult to argue with a starving population, they have generally succeeded in obtaining laws against engrossing, amassing, or forestalling provisions, and thus they remove the imaginary, and aggravate the real cause of their distress. This leads me to mention a very injudicious and injurious species of charity which is frequently practised upon such occasions. Persons of more benevolence than judgment purchase quantities of the ordinary food of the country, and sell them again to the poor at half price. The few observations I have made will shew that of all kinds of engrossing, this is the most mischievous, and that no regrating or forestalling is so injurious as this species, invented by mistaken benevolence, of buying dear and selling cheap in times of scarcity. It induces the farmers and dealers to send their stock more speedily to market, and it enables the poorer people to dispense with that harsh but necessary abstinence which alone can prevent the provisions from being entirely consumed long before a new supply can be obtained. Whenever this mode of charity is adopted, prices will necessarily rise on account of the increasing scarcity caused by such a premature and improvident consumption, and will generally arrive to such a height that even the reduced rates at which provisions are distributed by the charitable will be equal to the prices at which they would have been sold if charity had not led to any interference. This evil, caused by injudicious benevolence, could never be detected by experience. The increased prices would naturally be attributed to the scarcity which confessedly prevailed at the beginning of the season, and originally led to this interference. And the authors of this charitable scheme would even applaud its success, since on each particular day they would see the poor getting provisions at half the market price of that day, and would not consider that those very high market prices were principally caused by that charity which diminished the supply by causing an early consumption of it. This then is one of those numerous cases where what is called experience is in fact rash although disguised hypothesis, and where “theory” is extensive experience, enlightened and directed by common sense and reasoning.

Ought nothing then be done in times of scarcity to relieve the poor and mitigate their sufferings. Undoubtedly much may be done if it is judiciously attempted, if we direct our efforts to increasing the supply instead of accelerating the consumption of provisions. In this country especially, such assistance can be most easily afforded without importation. Potatos, it is well known, form the ordinary food of the labouring population. If there is a deficient supply of these, some distress and inconvenience must be felt. This evil will fall lightest if the supply is entirely consumed within the year, instead of part being held over until the next year, when it may not be so much wanted; and if the supply is equally distributed during that period, instead of too great a portion being consumed at the commencement of the season. Both these advantages we have seen are secured by the natural rise of prices, and nothing can be done by private charity or public legislation towards securing a better distribution of the existing supply. But much may be effected in the way of increasing the supply, or at least of diminishing the competition for it. Let those who can afford it abstain in such times from the use of potatos, or of animals fed on such food, and let them, if practicable, give a supply of bread at cheap prices to the poor. If this is done, the price of the staple food of the country will diminish instead of increasing as the season advances, and the scarcity will gradually diminish.

I fear I may be considered as having dwelt too long upon this subjcet, and I shall therefore leave it for the present, and conclude with some remarks upon the effects which regrating, forestalling, and other forms of speculation have upon price. Among the triumphs of Political-Economy, the victory it has obtained over the prejudices which so long existed against regrating and forestalling ought to be enumerated. Indeed so complete has been the victory that many of my auditors may perhaps not understand the meaning of those words, expressive of practices of which our ancestors entertained so great a terror. They signified by those words the buying up of goods to sell again in the same market. E. Spenser thus speaks in a passage you may see cited in Johnson’s Dictionary, under the title ‘regrating.’ “Neither should they buy corn unless it were to make malt thereof. For by such engrossing and regrating, the dearth that commonly reigneth in England hath been caused.” Our common law punished this offence of regrating or forestalling with the heaviest penalties, in the form of fines, imprisonment, and forfeiture. And our law books thus speak of it as “a kind of huckstry by which victuals are made dearer, for every seller will gain something, which must of necessity enhance the price.” These prejudices against regrating, though supported by such a plausible argument, have disappeared before the voice of sense and reason. Part of the fallacy of this reasoning of our common law arises from a misapprehension of the source of the profits of retailers, which have often been supposed to be an injury to the consumer, whereas it is the price which he voluntarily pays for the advantage, which but for the existence of such a class he should give up, viz. the power of buying commodities, when, and in such quantities as he wants them. Indeed the few remarks which I have made on the manner in which the cost of production influences the market price of articles, may shew that the price never can be encreased in order to pay wages or profits to men who unnecessarily and uselessly concern themselves in the sale or production of the article. The dealer does not sell higher than he buys, on account of that being necessary to his profit, but he buys when he foresees that the market is likely to rise, and he gains a profit according to the prudence and correctness of his speculation. If he sells at a profit, that very circumstance shews that the markets were better supplied at the time he bought than at the time he sold; and as he is not exempted from the general rule of being obliged to buy and sell at the current price, his dealings do not add any thing to the price of the commodity. They merely alter the time in which it is offered to the consumer, and transfer it from a period at which the comparatively low prices shew that provisions are comparatively plentiful, to a period when the comparatively high prices indicate a comparative scarcity. Neither can their proceedings occasion a dearth, since they do not diminish the entire stock of provisions within the kingdom, and are so far from causing waste that they prevent waste and premature consumption of the food. The more judicious are their speculations, the more benefit the public derives from them. And there is very little danger that any excess in speculation, such as their keeping their goods too long on hands, can be of any serious injury to the country. The care which the dealers will take of their own interests will be a sufficient protection to the public. Their information on the subject is generally pretty correct, as their success depends upon it, and their interests are identical with that of the community. The common interest of both is that the store of provisions within the country should be uniformly or equably consumed during the period which it is destined to supply. That this is the interest of the public is sufficiently evident. And it can be easily proved that the dealer best effects his object by acting as if he had this result in view. If more is brought to market during any time than the proportion due to that period, it follows evidently that less must be brought at some other time. Prices must therefore be higher in the latter than the former period, and therefore the speculator, by purchasing at the former and selling at the latter period, will consult his own interest in buying cheap and selling dear, and that of the public by withdrawing provisions from the market when they are comparatively plentiful, and offering them again to the public when times of greater scarcity come on; and if by excess in speculation he kept the markets for a short time inadequately supplied, that is, with less than that period’s fair proportion of the provisions destined to supply the year, the remainder of the year would on that account be better supplied, and the dealer would suffer by not having sold his goods when he could have obtained for them a higher price than will be given for the rest of the year. Such excess of speculation cannot continue so long as to do any serious injury to the public, since the dealer would soon be warned of his miscalculation by the gradually decreasing prices. A dealer soon learns to know what effects his speculations and purchases have upon the market price, and if the dearness is in part caused by his purchases, he knows that it will not continue, and he will cease to buy or to hoard what he forsees he must at a future period sell at a loss. Even a trifling rise of price would not be sufficient to secure him a fair profit on his capital, and an indemnity against the casualties of trade. The risk to the public is rather that he will not speculate enough. Even if he is guilty of an excess of speculation by keeping his provisions a little too long from the market, the injury thence resulting would not be so great as it would certainly be deemed in such a case. As long as those stores remained undisposed of in his possession, the public would think that the prices on each day were enhanced by his misconduct, by the excess of the market price above the price which provisions would sell at if all his stores, or at least a proper proportion of them, were on that day sent to market. But this is not the case. If his stores were sent to market they would cause a reduction of prices until they were disposed of, but after that period, whether they were sold and consumed or hoarded for future sale, can have no effect upon the market prices, unless so far as the knowledge that they are hoarded may have an effect in reducing the market price by dispelling the fears of famine.

This is not the only instance nor the only trade in which we shall find this close connexion between the interest of the individual and that of the community; and in general it may be remarked that the interest of the individual will lead him to adopt a course of conduct more consonant to the public good than even to that of the particular class or order to which he belongs. Having premised these few observations on the circumstances by which price is regulated, I shall call your attention to the circumstances which occasion some classes of labourers to obtain a higher rate of wages than other classes; but as the subject is of some importance, I must defer it until the next time I have the honor of addressing you here.