The Online Library of Liberty

A project of Liberty Fund, Inc.

• The Works and Life of Walter Bagehot, Volume VII.
• Adam Smith As a Person. (1876.)
• Mr. Disraeli As a Member of the House of Commons. (1876.)
• Lord Althorp and the Reform Act of 1832. 1 (1877.)
• The Chances For a Long Conservative Regime In England. 1
• Economic Studies.
• The Postulates of English Political Economy.
• I.—: The Transferability of Labour.
• II.—: The Transferability of Capital.
• The Preliminaries of Political Economy. 1
• Adam Smith and Our Modern Economy.
• Malthus.
• Ricardo.
• The Growth of Capital.
• Cost of Production.
• Appendix.
• Matthew Arnold On the London University. ( Fortnightly Review, June, 1868.)
• Senior’s Journals. ( Fortnightly Review, August, 1871.)

COST OF PRODUCTION.

I.

Many persons are much puzzled by the phrase exchangeable value—not only outsiders and learners, but even practical thinkers on the subject use it awkwardly, and do not feel that the idea is vivid in their minds. And, if we look at the matter historically, it is very natural that this should be so. No nation—no set of persons—who did not possess a fixed and efficient money ever attained the idea. Nations which only use barter know that a certain amount of one or two common things mostly exchanges for a certain amount of one or two other things;—but they have no conception of the “value” of one thing as against all other things. This idea is only gained by the use of money as a general common measure. By measuring all things—not one—against one, men come to be able to measure them against one another. “Price”—price in money—is the foundation of the economic idea of exchangeable value. But though it is the foundation of that idea, it is not the whole of it. “Money” is a commodity like any other, and it tends to fluctuate in the ratios in which it exchanges with other commodities, from chances affecting itself, just as they do in relation to it. At any single moment if you know the “prices” of all articles, you know their relative exchangeable value. But when you come to compare one time with another—say, the prices of to-day with those of this time last year—you might be much puzzled, for possibly all might have risen or all might have fallen. And this would have arisen not from anything which related to the things measured, but from something affecting the measuring instruments. What we mean by exchangeable value in Political Economy is not actual price, but perfect price,—the ratio in which everything exchanges against all other things—measured, not, as it is, by the intrinsically valuable measure of money, but as it would be against a similar measure which was invariable intrinsically.

We must bear in mind that on no two days, indeed at no two minutes, are the rates at which things exchange for one another at all the same. The price list of the Stock Exchange varies from hour to hour, and so do the prices in other markets. General “exchangeable value,” which is the sum total of price lists, is, therefore, incessantly altering. The fact which it denotes is one of the greatest complexity with which any science can have to deal, and it is no wonder, therefore, that most imaginations find it hard to get and keep a hold of it. Incomparably the best way to aid them in this, is to make an hypothesis, and to assume that money is of invariable value. Of course this is an hypothesis not coinciding with fact. On the contrary, it leaves out a whole range of facts. But if we are careful with it—if we remember what are the omitted facts, and make corrections for them if necessary—the hypothesis is of the greatest use. The figures of price are, in this case, like the symbols of Algebra; they hedge-in the mind to a definite thought.

But as a matter of fact, in markets, though monetary changes of price are incessant, yet general relations are constant; and in a former page we saw that in relation to articles which human industry can indefinitely multiply, and which it does so multiply for the hope of profit, and within a “nation” in the economic sense—that is, a group of producers within which labour and capital freely circulate—these constant relations are fixed by the “cost of production”. What, then, is this cost accurately? It is in relation to this that we shall find the hypothesis as to fixed value of money especially useful. All other modes of dealing with the subject are apt to leave the mind of the reader somewhat dull and stupid, and to make him, though convinced at each step of the reasonings, not quite sure of the effect of the whole.

This cost of production in a mature state of industry and where there is a strict division of persons into capitalists, artisans, and labourers, is the cost at which it would “pay” a capitalist to produce a given product, and the word “pay” means that he must have his “outlay,” the money he has expended, returned to him, and that he must have, over and above, so much, by way of profit—so much “to the good,” as we commonly speak—as will induce him to make the production. Translated into more abstract language, you can say that the capitalist must be in possession, or have the means of possessing himself, of certain articles, possessing exchangeable value; that those articles are parted with, or destroyed in making the product, and that he must have articles of equal exchangeable value returned to him by the exchange of his product, together with a profit. But though a most valuable way of speaking for some purposes, for those of common exposition, this abstract way is inferior to the more concrete way.

A great deal of the indistinctness which often hovers round the subject arises because those who think of it do not enough trace the matter as it runs through the mind of the capitalist. In our modern production all depends on him. It is he who settles what undertakings shall be embarked in, and what not; which things shall be made and which left unmade. The price at which a thing can be bought is the price at which the capitalist will undertake to lay it down; if you want to know why one thing is cheap and another dear, you must analyse in each case the calculations of the capitalist.

The first and most obvious thing which a capitalist must do, is to pay his wages. Labour—the muscular and mental force of man—is a main element in almost all kinds of production, and the principal one in many. But we must be careful not to imagine that this labour which the capitalist purchases is one thing. It is hardly even one kind of thing. The labour of a ploughman is distinct from that of a clerk; that of a clerk from that of an engine-driver; that of an engine-driver from that of a cabinet-maker, and so on without end. The difference between these various kinds of labour is in a great degree the consequence of acquired habit. Each man is trained in his department, and in it, therefore, he acquires a skill. These various kinds of training go down to very low degrees—to the “navvy,” who just knows how to dig out plain earth,—and runs up to the most accomplished artisan—the maker of astronomical instruments (say) who can turn out work of the finest and most minute accuracy, and to a great extent knows how he does it, and how that accuracy is acquired. There is a common coarse sort of human nature which can be taken a certain way in any pursuit, but which will not go very far; and over and above that, there is a finer element which can only be taken in one direction, or some few directions for which it has an affinity, and which is often accompanied by an incompetence to go even the first step in many others. Out of these natures specifically inclined to it, each trade gets its best labourers. The capitalist in each line has to try the various sorts, if he can get them, and to pay higher for the finer sorts. I say, if he can get them, because a main key to the reason why industries are distributed apparently so capriciously over the face of the country, is to be found in the power of being able to buy easily and cheaply all the kinds of labour which each kind of trade wants. In a place where a trade has long been carried on, all these tend to accumulate; a family tradition carries them on from father to son, and the whole mind of the place comes to be full of it. The language of the district soon assumes that you know it, and those who do not are a kind of aliens. “As water” in all cases “comes to the river,” so the place where a trade has long been carried on tends to attract those who by nature like that trade, and feel that they are fitted for it. Thus commerce, which, being wholly of human creation, one might have fancied to be very mutable, is really a thing most conservative. It will stay in a place for very many years which has given no natural facility to it,—often which seems to have interposed a difficulty. To get all the kinds of skill suitable for a trade in their proper proportions is a long task, requiring many years; a new place cannot have it for a long time, and an old place for a long time will be superior in this cardinal advantage.

One special kind of labour which almost every capitalist must have more or less of, is what we call his “establishment”; that is, his head men who transmit his orders, or give them to his corresponding clerks; his book-keeping clerks, who keep what we may call his “memory”; and the result of their labour shows what has become of his capital, and whether he is getting or losing. In some trades, as in banking, and some other distributive trades, this kind of charge is one of the greatest; and almost all people in a very large way of business have a large staff of confidential persons whom they know and who know them, and who work together with an efficiency, though often incessantly “having words,” which no casual gang suddenly collected can for an instant compete with.

Next, a capitalist must buy his “machines”. And there is no reason to take up time and space with saying how various and wonderful they are at the present day. Everybody will remember that, without its being said. What is much more to our present purpose is to say that outlay on wages has a different effect on the price of commodities from an outlay on machinery. If £100,000 is laid out during the year in wages, that sum must all be returned by the sale of the articles produced in the year. But that is not true of an outlay on machinery. On the contrary, £100,000 laid out on machinery need not all come back so soon. The machinery will last for years,—and the capitalist does not want to have the first outlay returned to him till the very end, when it is quite worn out. Money spent on wages is a lump sum, which the products of the year must return; money spent on machinery a sum repayable by terminable annuity, extending over all the years the machine lasts. Each cotton shirting must by its sale recoup the capitalist for the wages spent in making it; but it need only return to him a small fraction of the cost of the machinery by which it was made, because that machinery will go on making shirtings for many years, and it is the aggregate which must make the return to the capitalist, and not any one.

Machine-making, it is to be observed, is a trade which especially tends to adhere to particular places, because more than any other trade it requires the easy and cheap supply of the exact kind of skilled labour in the exact quantity in which it is wanted. And this you cannot have in a new place. A machine-making factory which would thrive at Birmingham, would starve at the Land’s End.

Next, a capitalist must mend his machinery; and this is the most conservative force of all. The number of subsidiary trades which any one great manufacture requires merely to keep its plant going, is very large, and in out-of-the-way spots no one of them, of course, exists. They only grow round the principal trade gradually, and as times goes on. And many of them are subsidiary to several trades. The place, therefore, which has longest had possession of such trades has an incalculable advantage, as far as this item is concerned.

Next, the capitalist, having bought his machinery, must buy the power of moving that machinery. And this is a point on which very many people have no clear notions; there is a difficulty in comprehending the difference between the two,— a disposition to confound force and wheels. In the old times of watermills and windmills, I am inclined to think that the distinction was clearer; it was then patent that the most elaborate machinery would not move unless there was some external force to push it. But the use of coal has rather mystified the matter. People do not see the pushing power, and therefore they do not believe that it exists. A steam-engine is so large and complex a thing that people in general have no real idea how it moves. The truth of course is that the burning of the coal heats the water, that the heating of the water causes it to expand, that this expansion gives a “shove,” and that all the rest of the machine only transmits and passes on that “shove”. You must have something like this to start with—something that will produce a pressure, or you cannot move your machinery at all. I have known highly experienced men of business, however, who are very far from clear about this. In discussion as to the consequences of the extinction of our “coal,” nothing is more common than to hear it said: “Oh, then we must adopt new forms of machinery”. You might as well try by improving and educating the mothers to continue a species without fathers. There is a certain motive “power” in nature which is as essential as any matter to be moved.

This element in the cost of production tends quite in the opposite way to the previous ones; it tends not to keep trade where it is, but to make it move. The best coal mines, the best sources of power of all kinds in each district, are soon appropriated and used. The natural tendency of trade, as far as this element in the cost of production guides it, would be to move incessantly over the face of the world, always touching the best sources of power only—the quickest water-courses, the most exposed sites for windmills, the best coal mines,—and never stopping to exhaust the second-rate sources.

Next, the capitalist must buy the materials which he is to work up with this power and this machinery. And the effect of this item, too, is just like the last. It tends to migration. The principal materials of industry are the tissues of vegetables, the fleeces and skins of animals, and the products of mines. And commerce is for ever hunting out the places at which such animals can be reared, such vegetables grown, and such minerals extracted. New places are constantly being discovered where these can be done, and manufactures, if not tied by the other items of cost, would be for ever stimulated to move by this one. Then the capitalist must rent the land on which his factory is built, or on which his business is carried on, and what the laws are by which this is regulated we have seen.

Next, he must pay interest on as much of his capital as he finds it convenient to borrow, and as he can get the loan of. And this is a steady cause operating in favour of old countries, because capital has there accumulated and is cheap, whereas in new countries it is still scarce and cannot be borrowed, except at great cost, if at all. As commerce becomes involved and credit complex, more and more of business tends to be carried on with borrowed money; and the comparative cheapness of it in established places of industry is one of the reasons why trades stay there as they do,—why so many of them are stationary, and so few migratory.

Lastly, in many cases, though not in all, the capitalist must make known the goodness—or, at least, must allege the goodness—of his work. Advertising is a kind of outlay which to some extent is essential in all trades, and it takes different forms. A company which hires a showy shop front, a broker who is for ever sending round trade circulars, are really advertising just as much as dealers who insert in the newspapers puffs of their articles; the end in all cases is to sell something, and in the long run the buyer pays for it all.

I have been speaking as if all products were made or manufactured. Common language has no apt expressions for the general ideas of Political Economy. There is no easy mode of describing all the processes by which all sorts of articles are changed by men from the state in which they are worth less, into that in which they are worth more. The case of a manufacturer is the simplest case to the imagination, and I have, therefore, taken it as the standard. Besides it, there are the breeding of animals, the growth of vegetables, and the extraction of minerals; but any one who has analysed the outlay of the capitalist in manufactures will have no difficulty in doing so for the others;—mutatis mutandis it all comes to the same thing, though the words of describing it differ. In all, the capitalist will have to pay wages; to buy co-operative instruments (animals included); to obtain a site; probably to borrow capital; probably to make known the value of his article. His outlay will be on these; and what he has over, after replacing these, is profit. The whole of business in great commercial countries is that of a replacement, with an addition of capital. As a rule, the capitalists of a trade must have their capital returned to them with the profit of the country, or they will not continue in that trade.

II.

One result of these truths is, I think, to clear up the most abstruse discussion in which English Political Economy has recently been engaged—the discussion which Mr. Cairnes raised against Mr. Mill on the “cost of production”. And this result is just of the kind which might be expected, for it is in the beginning of arguments that their difficulties are hidden and any one who will really go back to that beginning will be sure to meet his reward. Let us look at the matter a little carefully.

When any article, say a steam-engine, is in our modern state of industry produced by a capitalist maker, it is necessary to repay to that capitalist maker all which he has expended upon it; if it cost £500, and the current rate of profit be a 10 per cent. rate, he must have £550. His capital must be returned to him, and he must have the remuneration for that capital for the risk of losing it, for the trouble of managing it, and so on. But Mr. Mill takes his analysis further. He analyses the cost of production into the “wages of labour,” and the “profits of capital,” and after speaking of the former, thus proceeds: “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 profits of a fresh set of machine-makers, and of the miners and ironworkers 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.”

But this reasoning assumes that all capital comes from “abstinence,” whereas a great deal of it does not. What the capitalist in this case really hires is the use of the past plant of the world, whatever its origin. Thus the steam-engine maker hires the use of a whole series of tools and things, going back to the first flint implements, and the first tamed animals. In the first beginnings of that series—the link on which it all hangs—there was no relinquishment of any enjoyment. There was no such “abstaining,” as Mr. Mill supposes, and therefore Mr. Mill’s analysis fails. He takes us back into a hypothetical history which he does not prove, and which he could not prove, for it is not true.

Further, Mr. Mill’s analysis supposes the present organisation of industry—that in which the capitalist buys the force of the labourer and pays him wages—to be the one which began at the beginning. Mr. Mill says: “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 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 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.”

This principle, as applied to existing societies, may seem very obvious; indeed, it is most commonly assumed in popular discussions, both as being true and as being the principle of English Political Economy. But, nevertheless, most eminent Political Economists refuse to regard it as ultimate, and try to get behind it. And, no doubt, in one sense it is not ultimate. There are processes acting on value of which it does not take account. For example, the wages of similar labour tend—though slowly—to be equal in all employments, and it is contended that you ought not to say that the exchange value of an article has arrived at its “cost value” while the wages paid in its production are greater or less than those paid to similar labourers in other employments. Again, the wages of dissimilar kinds of labour bear, as a rule, some kind of proportion to one another (though the exceptions to this rule are in all societies many, and though some of them last for a very long time), and it is said that we have not arrived at the “cost value” of any article until, in the case of that article, the different species of labour are rewarded in the same proportion that they are in the case of other articles. And, no doubt, if we choose, we may thus define “cost value”; we may say that it is not realised till these conditions are satisfied. But if we do, we must go further, and regard “cost value” as an ideal limit, rather than as any actual thing at all. In truth the conception of the universal influence of the capitalist-employer is essentially modern. We have seen before that capital is scarce in new countries, that it moves slowly, and that the labourer and the capitalist are often one and the same. There is no such separate outlay as Mr. Mill’s analysis presumes, and as our modern practice exhibits. On a large scale no such thing is possible till a good available money exists in which wages can be paid; and such a money did not begin till the human race had been working and labouring for many hundred years.

Mr. Mill’s attempt to answer the question, “What is the cost of production which determines value?” by saying that it is the sum of the wages of labour and profits and abstinence since the beginning of history, fails therefore at both its cardinal points—for in the beginning of history there was much capital yielding profit which did not come from abstinence, and much labour which was not paid by wages; and this capital and this labour were the seeds of all which now is, and must be reckoned in the list of things that made it, if we add up those things.

Nor do I think that Mr. Cairnes, most acute as he is here, as always, at all mends the matter. He says “that Mr. Mill was wrong in adding up past wages and past profits so as to make a total ‘cost of production,’ for that neither ‘wages nor profits’ are properly part of that cost at all”. He tells us: “Of all ideas within the range of economic speculation, the two most profoundly opposed to each other are cost and the reward of cost,—the sacrifice incurred by man in productive industry, and the return made by nature to man upon that sacrifice. All industrial progress consists in altering the proportion between these two things; in increasing the remuneration in relation to the cost, or in diminishing the cost in relation to the remuneration. Cost and remuneration are thus economic antitheses of each other; so completely so, that a small cost and a large remuneration are exactly equivalent expressions. Now in the analysis of cost of production which I have quoted, these two opposites are identified; and cost, which is sacrifice, cost, which is what man pays to Nature for her industrial rewards, is said to consist of wages and profits, that is to say, of what Nature yields to man in return for his industrial sacrifices. The theory thus in its simple statement confounds opposite facts and ideas, and further examination will show that it involves conclusions no less perplexed, and in conflict with doctrines the most received.”

But the “cost of production,” in the sense in which that cost determines market value, means the “cost” to the person who brings it to that market. In England, at present, the capitalist pays the wages, and he will not do it unless he earns the profit. These pecuniary items are certainly elements in price, and “exchangeable value” is only an abstract word for a perfect price—a price which would never alter by changes in the money medium—and changes in which, accordingly, would show accurately the changes in the buying power of things. The pecuniary remuneration to the labourer, and the pecuniary remuneration of the capitalist, seem to me to be essential ingredients in the permanent money price which is to pay them both, for that price must permanently be such as will so pay them, and so pay them adequately.

Again, I do not think that abstinence and labour, or the rewards of them, are the sole elements in the existing cost of production. There is a third, which I call the hire of the present plant—of the existing productive things in the world. Suppose that a man goes into business with borrowed capital only, he will have to pay the “compensation” to abstinence, that is, the interest on capital to the man who lends him the money, and he will have likewise to hire labourers and pay them their wages. But besides this, he will have to hire machines to make his things. I say hire, not buy, for as far as the “cost of production” goes, this word gives more readily the required idea. A capitalist who has bought his machine gets back his money by an annuity; in the price of each bale of goods which he sells he includes a fraction of that annuity. It is as if he hired the machine and paid so much per bale as a rent or royalty for using it. When he buys the machine he commutes this royalty for a sum down. But he must get it repaid him annually for all that. And this repayment is so much to be added to the interest which he pays on his borrowed capital, and to what he pays in wages. It is an outlay which is a compensation neither for abstinence nor labour.

Cairnes would probably have said that as all the machines so hired were produced once by abstinence and labour, the hire of them was really a compensation to that past abstinence and labour. But here historical investigation again helps us. We have seen that the existing producing things of the world are the growth of a long history—that they are the product of many things, and that they cannot be set down as the products of simple abstinence and simple labour. If you resort to an historical explanation, the first requirement is that the history must be true. No hypothesis or set of abstractions can help here. The appeal is to what has happened in matter of fact, and what is said to have thus happened never did so. And you cannot even confine such reasoning to somewhat developed states of society, for the very essence of this reasoning is to go back into the past and to assume that the cause of economic production has been uniform—has always been the product of the same two stated agencies.

And not only are the real facts of the growth of wealth thus inconsistent with the analysis which both Mill and Cairnes give us of the “cost of production,” but they are still more inconsistent with the analysis of that cost which was generally held by the preceding generation of English Economists, and which is constantly to be found in the writings of Ricardo, though what seems to me to be a truer view is, as I shall presently show, to be found there also. This older analysis considers that “labour” is the sole source of value, and that all things of the same price have been produced by an equal quantity of “labour”. But this older theory is evidently more unlike the facts than either of the newer ones. We have seen that these were not true, because they assumed that two factors—labour and abstinence—were the sole sources of wealth. And a fortiori the older theory is untrue, for it assumes that a single factor—labour—has alone produced wealth.

III.

The difference which remains over in the hands of the capitalist is his profit. And this is a most essential element in the cost of production, for everything in developed trade depends on him. Unless he brings an article to market it will not be brought, and he will not bring it unless he has enough to repay him for what he does. And what he does is the most intellectual part of wealth—production and distribution. He is to the rest of the people so engaged what the general is to the army. It is he who settles what work operatives shall do, what sums clerks shall add up, how the managing men shall be employed. Not only does he save his capital and does not eat it, not only does he risk his capital, but he manipulates his capital. It is common to speak of the intellectual part of profit as the “wages of superintending wisdom”. You might as well call whist superintending the cards. A man who plays cards very ill, will probably “play” his capital just as ill. The same kind of sagacity, the same observation, the same self-restraint are required in both. But though this is required of the capitalist, it is not all which is required. There is quite a different element besides. All business is in the nature of a game more or less difficult; and requires the same sort of faculties, and the same kind of attention, as a game. But in most trades a capitalist has to govern others; a large employer of labour has to govern many men. He has not only to move his pawns, but to rule his pawns. The pieces with which he plays are of flesh and blood, and will not move unless they like. He has to manage that they shall like. And, unless he is paid for all this, the article will not be made.

Ricardo was the first to give anything like this analysis of the cost of production. We have seen how imperfect, how confused, the analysis of Adam Smith was. Nor was there any great step in the matter made between his time and Ricardo’s. The subject was not accurately worked out.

The analysis of Ricardo was, undoubtedly, defective, and he got himself into a difficulty of language which perplexes his writings and puzzles half his readers. Bentham said that he “confounded ‘cost’ and ‘value’ ”. And, in fact, having satisfied himself that things of equal cost of production will in the long run exchange for one another, he came to speak of the effect as if it were the cause, and of the cause as if it were the effect. I do not think he actually confused the two in thought, but he often seems to do so. Not being a highly educated man, he had, as has been said, a curious difficulty in the use of abstract language. He is like a mathematician in whose work there are a good many small inaccuracies, but whose work is still in the main right. Of course such a mathematician is a very imperfect one; the essence of mathematics is accuracy. In the same way Ricardo is a very imperfect abstract writer. The essence of abstract writing is precision, and in his use of abstract words he is defective in precision. Still the fault is of words only. When you come to examine the thought, you find that there was no obscurity in it; that it was perfectly clear in his mind.

It is a much worse fault that he only incompletely seized the notion that in an advanced state of society, where the capitalist brings the labour and offers the article for sale, the cost to the capitalist is that which regulates the value. No doubt, as we have seen, it is easy to imagine a simple society, where the labourers all support themselves—a set of hunters and weavers and fishers—where labour migrated from employment to employment just as one was better remunerated than another, and in which labour being the sole cost of production (that is to say, the labourers owning their own food and using their own tools), it was this migration which adjusted exchangeable value to cost. But there is a much quicker adjustment when capital is movable, and rapidly changes from employment to employment. What it costs the capitalist together with his profit settles the value. It does so, though the rate of wages for equal qualities of abour may be higher in one trade than another. As long as that is the case, the cost will be higher in the trade where wages are higher; and, therefore, the article produced will sell for more. In the end, labour will in most cases migrate from the badly paid to the well paid employment, and then the labour in both will be equally remunerated, and the price so far as it depends on labour will be the same. But even before this, the cost of production to the capitalist will regulate the price just as much as it does afterwards.

Ricardo might, more than any one else, have been expected to point this out, for he had an infinitely better perception of the quickness with which capital moves than any previous economist, and of the way in which it moves. “Whilst every man is free to employ his capital where he pleases, he will naturally seek for it that employment which is most advantageous; he will naturally be dissatisfied with a profit of 10 per cent., if by removing his capital he can obtain a profit of 15 per cent. This restless desire on the part of all the employers of stock, to quit a less profitable for a more advantageous business, has a strong tendency to equalise the rate of profits of all, or to fix them in such proportions as may, in the estimation of the parties, compensate for any advantage which one may have, or may appear to have, over the other. It is perhaps very difficult to trace the steps by which this change is effected; it is probably effected by a manufacturer not absolutely changing his employment, but only lessening the quantity of capital he has in that employment. In all rich countries, there is a number of men forming what is called the moneyed class; these men are engaged in no trade, but live on the interest of their money, which is employed in discounting bills, or in loans to the more industrious part of the community. The bankers too employ a large capital on the same objects. The capital so employed forms a circulating capital of a large amount, and is employed, in larger or smaller proportions, by all the different trades of a country. There is perhaps no manufacturer, however rich, who limits his business to the extent that his own funds alone will allow; he has always some portion of this floating capital, increasing or diminishing according to the activity of the demand for his commodities. When the demand for silk increases, and that for cloth diminishes, the clothier does not remove with his capital to the silk trade, but he dismisses some of his workmen, he discontinues his demand for the loan from bankers and moneyed men; while the case of the silk manufacturer is the reverse: he wishes to employ more workmen, and thus his motive for borrowing is increased: he borrows more, and thus capital is transferred from one employment to another, without the necessity of a manufacturer discontinuing his usual occupation. When we look to the markets of a large town, and observe how regularly they are supplied both with home and foreign commodities, in the quantity in which they are required, under all the circumstances of varying demand, arising from the caprice of taste, or a change in the amount of population, without often producing either the effects of a glut from a too abundant supply, or an enormously high price from the supply being unequal to the demand, we must confess that the principle which apportions capital to each trade in the precise amount that it is required, is more active than is generally supposed.”

From this passage it would have been expected that Ricardo would have said that in the state of industry with which he was here dealing, the cost of production which determines the price was the outlay of the capitalist, plus his profit, and that he would so have shown the subject in its true simplicity. But though in many passages he approaches to this clearness, though continually you seem to see the thought in his mind, he never quite utters it. You can nowhere find it in words. The difficulty of applying to real life the doctrine of cost of production, when otherwise explained, comes out in the following passage. “In speaking,” says Ricardo, “however, of labour as being the foundation of all value, and the relative quantity of labour as almost exclusively determining the relative value of commodities, I must not be supposed to be inattentive to the different qualities of labour, and the difficulty of comparing an hour’s or a day’s labour, in one employment, with the same duration of labour in another. The estimation in which different qualities of labour are held, comes soon to be adjusted in the market with sufficient precision for all practical purposes, and depends much on the comparative skill of the labourer, and intensity of the labour performed. The scale, when once formed, is liable to little variation. If a day’s labour of a working jeweller be more valuable than a day’s labour of a common labourer, it has long ago been adjusted, and placed in its proper position in the scale of value.”

And fifty years ago, when manufactures grew but slowly, and when the arts were comparatively stationary, this mode of speaking may not have been wholly incorrect—at any rate was not perfectly false. But now-a-days the different skill used in different employments varies incessantly; it tends to increase with every improvement in quality; it tends to diminish with every improvement in machinery. Even between the same employment at different times it is difficult to compare it, and between two different employments it is impossible to compare it. In a long time the circulation of labour from employment to employment no doubt brings about a rough and approximate equality. But this is only in a long time; it is a gradual and most incalculable operation. The cost of production would hardly, in any practical sense, determine price at all, if it only determined value after so many years and so irregularly. In fact, capital travels far quicker than labour, and there is some approximate equality between the products of two equal and similarly circumstanced capitals; and “cost of production,” when analysed properly, is a prompt and effective regulator of “value”.

But though Ricardo did not see this, as it is easy to see it now, he saw more clearly than many people now do that a rise of wages does not entail a rise of prices. As yet I can only deal with the case of a money-mining country; a country of gold and silver mines; whether the fact that money—that the precious metals—are obtained by foreign trade, does, or does not, make a difference, will appear afterwards. But in the money-mining country nothing can be clearer. Nothing can change relative value except that which alters relative cost of production; what acts equally on all commodities will alter the exchangeable quality of none. If all equal capitals were spent in wages equally—say, if one-half of every £100 was always so spent in every trade, including money-mining—a rise, say, of twenty per cent. would not affect values at all. It would tell on gold-mining as well as on every other kind of production. “Hats,” to take Ricardo’s favourite article, would be produced at twenty per cent. more cost, but then sovereigns would be produced at twenty per cent. more cost also. And, therefore, there would be no more reason for raising the value of hats as against sovereigns than the value of sovereigns as against hats. The cause on one side is equal to the cause on the other.

This is at present curiously neglected in our common discussions. So far from Political Economy having advanced on this point since Ricardo’s time, it—at least, the common exposition of it—has retrograded. In the incessant discussions of late years as to the effect of Trades Unions, it is perpetually assumed that, if these Unions extended to all employments, and if they produced a rise of wages in them all, they would certainly and necessarily produce a universal rise of prices. But the slightest thought would have shown that this rise, at least in a gold-mining country, would act on the gold as well as on the commodities exchanged for gold, and that the effect upon the one would counter-balance the effect upon the other.

Ricardo’s conception of the cost of production was oversimplified; it left out part of the truth, and, consequently, gave an undue prominence to the other parts. But the slightest comparison between it and the ideas of Adam Smith will show how great is the advance which Political Economy has made between the two writers. Ricardo’s is a first approximation to an exact science; Adam Smith’s is but a set of popular conceptions—always sensible, but often discordant.

IV.

But it will be asked, if in each trading country the trader must receive the rate of profit of the country,—what is it which determines that rate of profit? And this is rather a long topic of inquiry.

For popular purposes, it is easy to say that the profit of a capitalist in any undertaking is that which remains after the cost of that undertaking has been satisfied. The outlay must be repaid, and what remains over is profit. But in an ordinary undertaking, say, in making cotton twist, there is this difficulty: a great deal of the outlay is upon machines and raw material, which are the results of previous undertakings, and which must in the long run be valued at the outlay on these undertakings, plus the profit at the rate of the time and country, and this profit is exactly what we are in search of. The common trade facts do not give us that which we want to know in a sufficiently simple form.

Supposing one capitalist ordered the whole article from the beginning; suppose the country was one in which cotton was grown; and suppose that the capitalist who grew it made all the necessary machines (including any preliminary ones necessary to make them), it is evident that his outlay would be of one sort, wages only. He would have to deal exclusively with labourers, for he would go himself to the root of the matter, and would employ the results of no previous capitals. His outlay would then consist of wages only, and his profit would be the amount remaining to him when that outlay was recouped. He would sell his article, and his profit would be the price, minus the wages paid.

This analogy represents the real facts much more accurately than would at first sight appear. Supposing the profits of all trades to be equal, it would represent them exactly. The manufacture of a consumable article is divided, say, into a hundred undertakings by various capitalists. If any one of these were—all things considered—more profitable than the others, capital would leave those others, and would collect in it. The natural tide of capital from the less to the more remunerative enterprise makes the profits in each part of an entire manufacture equal—which is as much as to say that it makes the entire manufacture just what it would have been had one single capitalist ordered or managed the whole of it from the very beginning to the very end. As we have seen, this doctrine of the equality of profit is but an approximation, but we have also seen that it is a most useful approximation, and what are the corrections to be made in using it. Subject to these corrections, therefore, we can say that the profit on an article—entirely made and manufactured in the same country—is the price of the article minus the wages spent on it. But we must reserve an inquiry into the possible profit where foreign materials and machines are used, for there is no transfer hither and thither of capitals between nations, and no consequent equality in the returns on them. We can only return to that case after examining the primitive simple one, where everything is made in the same country.

You say, I shall be told, that the profit is the selling price, minus the outlay, but you do not tell us what is the selling price. Nor can it be told without seeing how money is obtained. The price of a thing is the money for which it exchanges, and you must consider the nature of it before you can know what that price will be.

The money of commerce is composed of the precious metals—gold and silver—say, for shortness, gold, which is a commodity like any other. It is raised in the same way as iron, and according to the same laws. The capitalist must have in it the same profit that he has in other trades and no more. But the difference between it and other trades is that there is no need to sell the article. A capitalist raises so much gold, after a certain outlay; he can take that gold to the Mint, and the difference between it and the outlay is the profit. There is no haze about it; no difficult words such as price and value. It is a definite physical quantity—10,000 sovereigns were expended on the mine, and 11,000 came out, making a profit of 10 per cent. The standard rate of profit in money-mining is the rate of profit in the least productive money mine that can keep itself at work. All other profits compare themselves with that, for money is the standard of comparison, the reckoning engine.

Suppose it takes a third less labour and a third less machines to produce an ounce of gold; an ounce of gold will exchange for one-third less of other things; its buying power will be that much less; corn, cotton, and all other things, will exchange for so much more of it.

The money price of mining machinery will rise, the outlay of money necessary to work mines will augment, and the return to it, though greater in quantity, will be identical in proportion—will be the same rate per cent. The gold-mines which cannot pay that profit will be disused, just as old worn-out iron-mines are disused, and from the same cause—it no longer pays to work them. There will, however, be this difference, though the rate of profit in the gold trade will be the same, in other respects the trade will have changed. General prices will have altered.

In consequence, more money will be necessary to circulate the same commodities,—to do the same business. The same moneyed capital in the gold trade will produce the same number of sovereigns as before; it will yield as much per cent. The change will be, that the same “moneyed capital” will buy less labour and fewer machines, and the number of sovereigns that make the profit, though the same, will buy less of other things.

At every particular value of a sovereign there are a certain number of sovereigns required to carry on the business of a country. If more than that number is supplied, their value—their buying power—will diminish, and the price of all other things measured against them will rise. The machinery and labour by which sovereigns are made are a part of those other things, and their price will rise too. The outlay on the production of sovereigns will augment, and there will be a discouragement to produce them. The price in “sovereigns” of all other articles will have risen, as well as the outlay on their production; the apparent profit in producing them will, therefore, be as before. But though the outlay on a given number of sovereigns has risen, they are in no way better than before. There will, therefore, be a diminution in the production of sovereigns, and the number in circulation will be reduced to that required at cost value to conduct the trade of the country.

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The money rate of wages is a case of “supply and demand,” using those words in the sense in which they have been explained—that is, it is determined by the amount of money which the owners of it wish to expend in labour, by the eagerness with which they want that labour, by the amount of labour in the market which wishes to sell itself for money, and by the eagerness with which the labourers desire that money. This, as we have seen, is peculiarly a case in which the market feelings of the two bodies of exchangers are carefully to be considered. If the labourers are in want, they must take whatever the capitalists offer them; if the capitalists are in want, they must buy the labour on the cheapest terms they can, but get it they must. And the capitalist is as likely, perhaps, to be in want as the labourer. It is true that the distress of the labourer is much more conspicuous, and that he advertises it; he goes about saying: “I am starving, and it is the tyranny of capital which is killing me”. But it is also true that the capitalist is in danger of ruin, and that he conceals it. If he cannot complete contracts which he has made, if he has to stay out of a return from his business longer than he can afford, he is ruined. But he will never say this, because it may injure his credit and quicken the coming of the evil. He will lie awake with anxiety till his hair turns prematurely grey, and till deep lines of care form on his brow, but will say nothing. And it is necessary to insist on this now, because our current literature—some even of our gravest economic literature—is dangerously tainted with superficial sentiment. It speaks much of the sufferings of the working men which are seen, and little of those of the capitalist which are not seen. But the capitalist, being a higher and more thinking kind of man, is probably of more sensitive organisation than the labourer, and pecuniary anxiety is a more racking thing than any physical kind of pain short of extreme hunger. The mental feelings of the capitalist must just as much be regarded as those of the labourer in computing the rate at which the money of the one will be exchanged for the labour by the other.

The real remuneration of the labourer is, of course, not settled by this bargain. Money is of no use to him any more than to others, except for what it will fetch (indeed, as his wants are more immediate he feels this truth more than most others), and of what use it will be is settled by its purchasing power. This is again but a new case of supply and demand in the full sense of those terms. If the labourer is needy and has nothing beforehand, he will not be able to make his money go so far; he will be obliged to take anything which the shopkeeper will give him. At other times, he, like other people, may buy the goods of a bankrupt, “going at a sacrifice”. He is also at the mercy of the other causes which raise the price of the articles on which he spends his money. A short harvest will send up the price excessively by diminishing the supply of food which the labourer wants more than anything else in the world; the passage of an army through the district will just as much effect this by introducing new mouths to be fed, who take the food with paying for it or without. The real remuneration of the labourer in commodities is settled by one case of ordinary exchange against money, just as the money price of that labour is settled by another.

It has, indeed, been contended that there is something special in the article “labour” which affects this matter. It is said that if “labour” is not sold on a certain day—that is, if the labourer is idle—that labour is lost in consequence, whereas “commodities” are permanent, and can be sold one day as well as another. But many commodities are, as we all know, very perishable, and are so without changing the principle on which their price is settled. And hiring a man and hiring a horse are obviously acts of the same species. The laws which settle monetary value are the same in the case of labour as in other cases.

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