CHAPTER III. OF COST OF PRODUCTION, IN ITS RELATION TO VALUE. § 1. WHEN the production of a by labour and capital, but can be made commodity is the effect of labour and by them in indefinite quantity, this expenditure, whether the commodity Necessary Value, the minimum with is susceptible of unlimited multiplica- which the producers will be content, is tion or not, there is a minimum value also, if competition is free and active, which is the essential condition of its the maximum which they can expect, being permanently produced. The If the value of a commodity is such value at any particular time is the that it repays the cost of production result of supply and demand; and is not only with the customary, but with always that which is necessary to a higher rate of profit, capital rushes create a market for the existing supply. to share in this extra gain, and by inBut unless that value is sufficient to creasing the supply of the article, repay the Cost of Production, and to reduces its value. This is not a mers afford, besides, the ordinary expecta- supposition or surmise, but a fact tion of profit, the commodity will not familiar to those conversant with comcontinue to be produced. Capitalists mercial operations. Whenever a new will not go on permanently producing line of business presents itself, offering at a loss. They will not even go on a hope of unusual profits, and whenproducing at a profit less than they can ever any established trade or manulive upon. Persons whose capital is facture is believed to be yielding a already embarked, and cannot be easily greater profit than customary, there is extricated, will persevere for a con- sure to be in a short time so large a siderable time without profit, and have production or importation of the combeen known to persevere even at a modity, as not only destroys the extra loss, in hope of better times. But profit, but generally goes beyond the they will not do so indefinitely, or mark, and sinks the value as much too when there is nothing to indicate that low as it had before been raised too times are likely to improve. No new high; until the over-supply is corrected capital will be invested in an employ-by a total or partial suspension of furment, unless there be an expectation not only of some profit, but of a profit as great (regard being had to the degree of eligibility of the employment in other respects) as can be hoped for in any other occupation at that time and place. When such profit is evidently not to be had, if people do not actually withdraw their capital, they at least abstain from replacing it when consumed. The cost of production, together with the ordinary profit, may, therefore be called the necessary price or value, of all things made by labour and capital. Nobody willingly duces in the prospect of loss. Whoever does so, does it under a miscalculation, which he corrects as fast as he is able. ther production. As already intimated,* these variations in the quantity produced do not presuppose or require that any person should change his employment. Those whose business is thriving, increase their produce by availing themselves more largely of their credit, while those who are not making the ordinary profit, restrict their operations, and (in manufacturing phrase) work short time. In this mode is surely and speedily effected the equalization, not of profits perhaps, but of the expectations of profit, in pro-different occupations. Where commodity is not only made As a general rule, then, things tend to exchange for one another at such values as will enable each producer to be repaid the cost of production with the Supra. p. 249. ordinary profit; in other words, such as will give to all producers the same rate of profit on their outlay. But in order that the profit may be equal where the outlay, that is, the cost of production, is equal, things must on the average exchange for one another in the ratio of their cost of production; things of which the cost of production is the same, must be of the same value. For only thus will an equal outlay yield an equal return. If a farmer with a capital equal to 1000 quarters of corn, can produce 1200 quarters, yielding him a profit of 20 per cent; whatever else can be produced in the same time by a capital of 1000 quarters, must be worth, that is, must exchange for, 1200 quarters, otherwise the producer would gain either more or less than 20 per cent. Adam Smith and Ricardo have called that value of a thing which is proportional to its cost of production, its Natural Value (or its Natural Price). They meant by this, the point about which the value oscillates, and to which it always tends to return; the centre value, towards which, as Adam Smith expresses it, the market value of a thing is constantly gravitating; and any deviation from which is but a temporary irregularity, which, the moment it exists, sets forces in motion tending to correct it. On an average of years sufficient to enable the oscillations on one side of the central line to be compensated by those on the other, the market value agrees with the natural value; but it very seldom coincides exactly with it at any particular time. The sea everywhere tends to a level; but it never is at an exact level; its surface is always ruffled by waves, and often agitated by storms. It is enough that no point, at least in the open sea, is permanently higher than another. Each place is alternately elevated and depressed; but the ocean preserves its level. § 2. The latent influence by which the values of things are made to conform in the long run to the cost of production, is the variation that would otherwise take place in the supply of the commodity. The supply would be increased if the thing continued to sell above the ratio of its cost of produc tion, and would be diminished if it fell below that ratio. But we must not therefore suppose it to be necessary that the supply should actually be either diminished or increased. Suppose that the cost of production of a thing is cheapered by some mecha nical invention, or increased by a tax, The value of a thing would in a little time, if not immediately, fall in the one case, and rise in the other; and it would do so, because if it did not, the supply would in the one case be increased, until the price fell, in the other diminished, until it rose. For this reason, and from the erroneous notion that value depends on the proportion between the demand and the supply, many persons suppose that this proportion must be altered whenever there is any change in the value of the commodity; that the value cannot fall through a diminution of the cost of production, unless the supply is permanently increased; nor rise, unless the supply is permanently diminished. But this is not the fact: there is no need that there should be any actual alteration of supply; and when there is, the alteration, if permanent, is not the cause but the consequence of the alteration in value. If, indeed, the supply could not be increased, no diminution in the cost of production would lower the value: but there is by no means any necessity that it should. The mere possibility often suffices; the dealers are aware of what would happen, and their mutual competition makes them anticipate the result by lowering the price. Whether there will be a greater permanent supply of the commodity, after its production has been cheapened, depends on quite another question, namely, on whether a greater quantity is wanted at the reduced value. Most commonly a greater quantity is wanted, but not necessarily. A man," says Mr. De Quincey,* “buys an article of instant applicability to his own purposes the more readily and the more largely * Logic of Political Economy, pp. 230-1. Would the supply be diminished? Only if the increase of value diminished the demand. Whether this effect followed, would soon appear, and if it did, the value would recede somewhat, from excess of supply, until the production was reduced, and would then rise again. There are many articles for which it requires a very considerable rise of price, materially to reduce the demand; in particular, articles of necessity, such as the habitual food of the people; in England, wheaten bread: of which there is probably almost as much consumed, at the present cost price, as there would be with the present population at a price con as it happens to be cheaper. Silk handkerchiefs having fallen to half price, he will buy, perhaps, in threefold quantity; but he does not buy more steam-engines because the price is lowered. His demand for steamengines is almost always predetermined by the circumstances of his situation. So far as he considers the cost at all, it is much more the cost of working this engine than the cost upon its purchase. But there are many articles for which the market is absolutely and merely limited by a pre-existing system, to which those articles are attached as subordinate parts or members. How could we force the dials or faces of timepieces by artificial cheap-siderably lower. Yet it is especially ness to sell more plentifully than the in such things that dearness or high inner works or movements of such price is popularly confounded with timepieces ? Could the sale of scarcity. Food may be dear from wine-vaults be increased without in- scarcity, as after a bad harvest; but creasing the sale of wine? Or the the dearness (for example) which is the tools of shipwrights find an enlarged effect of taxation, or of corn laws, has market whilst shipbuilding was sta- nothing whatever to do with insuftionary? .. Offer to a town of ficient supply: such causes do not 3000 inhabitants a stock of hearses, much diminish the quantity of food in no cheapness will tempt that town into a country: it is other things rather buying more than one. Offer a stock of than food that are diminished in quanyachts, the chief cost lies in manning, tity by them, since, those who pay victualling, repairing; no diminution more for food not having so much to upon the mere price to a purchaser expend otherwise, the production of will tempt into the market any man other things contracts itself to the whose habits and propensities had not limits of a smaller demand. already disposed him to such a purchase. So of professional costume for bishops, lawyers, students at Oxford." Nobody doubts, however, that the price and value of all these things would be eventually lowered by any diminution of their cost of production; and lowered through the apprehension entertained of new competitors, and an increased supply: though the great hazard to which a new competitor would expose himself, in an article not susceptible of any considerable extension of its market, would enable the established dealers to maintain, their original prices much longer than they could do in an article offering more encouragement to competition. Again, reverse the case, and suppose the cost of production increased, as for example by laying a tax on the commodity. The value would rise; and that, probably, immediately. It is, therefore, strictly correct to say, that the value of things which can be increased in quantity at pleasure, does not depend (except accidentally, and during the time necessary for production to adjust itself,) upon demand and supply; on the contrary, demand and supply depend upon it. There is a demand for a certain quantity of the commodity at its natural or cost value, and to that the supply in the long run endeavours to conform. When at any time it fails of so conforming, it is either from miscalculation, or from a change in some of the elements of the problem: either in the natural value, that is, in the cost of production; or in the demand, from an alteration in public taste or in the number or wealth of the consumers. These causes of disturbance are very liable to occur, and when any one of them does occur, the market value of the article ceases to agree with the natural value. The real law of demand and supply, the equation between them, holds good in all cases: if a value different from the natural value be necessary to make the demand equal to the supply, the market value will deviate from the natural value; but only for a time; for the permanent tendency of supply is to conform itself to the demand which is found by experience to exist for the commodity when selling at its natural value. If the supply is either more or less than this, it is so accidentally, and affords either more or less than the ordinary rate of profit; which, under free and active competition, cannot long continue to be the case. To recapitulate: demand and supply govern the value of all things which cannot be indefinitely increased; except that even for them, when produced by industry, there is a minimum value, determined by the cost of production, But in all things which admit of indefinite multiplication, demand and supply only determine the perturbations of value, during a period which cannot exceed the length of time necessary for altering the supply. While thus ruling the oscillations of value, they themselves obey a superior force, which makes value gravitate towards Cost of Production, and which would settle it and keep it there, if fresh disturbing influences were not continually arising to make it again deviate. To pursue the same strain of metaphor, demand and supply always rush to an equili brium, but the condition of stable equilibrium is when things exchange for each other according to their cost of production, or, in the expression we have used, when things are at their Natural Value. CHAPTER IV. 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, * Supra, pp. 19, 20. 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 ob serve 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 abridgment 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 wager 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 |