§ 6. After this view of the nature and causes of rent, let us turn back to the subject of profits, and bring up for reconsideration one of the propositions laid down in the last chapter. We there stated, that the advances of the capitalist, or in other words, the expenses of production, consist solely in wages of labour; that whatever portion of the outlay is not wages, is previous profit, and whatever is not previous profit, is wages. Rent, however, being an element which it is impossible to resolve into either profits or wages, we were obliged, for the moment, to assume that the capitalist is not required to pay rent-to give an equivalent for the use of an appropriated natural agent: and I undertook to show in the proper place, that this is an allowable supposition, and that rent does not really form any part of the expenses of production, or of the advances of the capitalist. The grounds on which this assertion was made are now apparent. It is true that all tenant farmers, and many other classes of producers, pay rent. But we have now seen, that whoever cultivates land, paying a rent for it, gets in return for his rent an instrument of superior power to other instruments of the same kind for which no rent is paid. The superiority of the instrument is in exact proportion to the rent paid for it. If a few persons had steam-engines of superior power to all others in existence, but limited by physical laws to a number short of the demand, the rent which a manufacturer would be willing to pay for one of these steam-engines could not be looked upon as an addition to his outlay, because by the use of it he would save in his other expenses the equivalent of what it cost him: without it he could not do the same quantity of work, unless at an additional expense equal to the rent. same thing is true of land. The real expenses of production are those incurred on the worst land, or by the capital employed in the least favourable circumstances. This land or capital pays, as we have seen, no rent. Whoever does pay rent, gets back its full value in extra advantages, and the rent which he pays does not place him in a worse position than, but only in the same position as, his fellow-producer who pays no rent, but whose instrument is one of inferior efficiency.

The

We have now completed the exposition of the laws which regulate the distribution of the produce of land, labour, and capital, as far as it is possible to discuss those laws independently of the instrumentality by which in a civilized society the distribution is effected; the machinery of Exchange and Price. The more complete elucidation and final confirmation of the laws which we have laid down, and the deduction of their most important consequences, must be preceded by an explanation of the nature and working of that machinery-a subject so extensive and complicated as to require a separate Book,

the supply by one-third, the value rises one-third. By no means for when the value has risen one-third, the demand may still exceed the supply; there may, even at that higher value, be a greater quantity wanted than is to be had; and the competition of buyers may still continue. If the article is a necessary of life, which, rather than resign, people are willing to pay for at any price, a deficiency of one-third may raise the price to double, triple, or quadruple.* Or, on the contrary, the competition may cease before the value has risen in even the proportion of the deficiency. A rise, short of one-third, may place the article beyond the means, or beyond the inclinations, of purchasers to the full amount. At what point, then, will the rise be arrested? At the point, whatever it be, which equalizes the demand and the supply at the price which cuts off the extra third from the demand, or brings forward additional sellers sufficient to supply it. When, in either of these ways, or by a combination of both, the demand becomes equal and no more than equal to the supply, the rise of value will stop.

The converse case is equally simple. Instead of a demand beyond the supply, let us suppose a supply exceeding the demand. The competition will now be on the side of the sellers; the extra quantity can only find a market by calling forth an additional demand equal to itself. This is accomplished by means of cheapness; the value falls, and brings the article within the reach of more numerous customers, or induces those who were already consumers to make increased purchases. The fall of value required to re-establish equality, is different in different cases. The kinds of things in which it is commonly greatest are at the two extremities of the scale; absolute necessaries, or those peculiar luxuries, the taste for which is confined to a small class. In the case of food, as those who have already enough do not require more on account of its cheapness, but rather expend in other things what they save in food, the increased consumption occasioned by cheapness, carries off, as experience shows, a very small part of the extra supply caused by a good harvest ;† and the fall is practically arrested only when the farmers withdraw their corn, and hold it back in hopes of a higher price; or by the operations of speculators who buy corn when it is cheap, and store it up to be brought forth when more urgently wanted. Whether the demand and supply are equalized by an increased demand, the result of cheapness, or by withdrawing a part of the supply, equalized they are in either case.

Thus we see that the idea of a ratio, as between demand and supply, is out of place, and has no concern in the matter: the proper mathematical analogy is that of an equation. Demand and supply, the quantity demanded and the quantity supplied, will be made equal. If unequal at any moment, competition equalizes them, and the manner in which this is done is by an adjustment of the value. If the demand increases, the value rises; if the demand diminishes, the value falls again, if the supply falls off, the value rises; and falls, if the supply is increased. The rise or the fall

* 'The price of corn in this country has risen from 100 to 200 per cent. and upwards, when the utmost computed deficiency of the crops has not been more than between one-sixth and one-third below an average, and when that deficiency has been relieved by foreign supplies. If there should be a deficiency of the crops amounting to one-third, without any surplus from a former year, and without any chance of relief by importation, the price might rise five, six, or even ten-fold.'Tooke's History of Prices, vol. i. pp. 13-5.

† See Tooke, and the Report of the Agricultural Committee in 1821.

continues until the demand and supply are again equal to one another: and the value which a commodity will bring in any market, is no other than the value which, in that market, gives a demand just sufficient to carry off the existing or expected supply.

This, then, is the Law of Value, with respect to all commodities not susceptible of being multiplied at pleasure. Such commodities, no doubt, are exceptions. There is another law for that much larger class of things, which admit of definite multiplication. But it is not the less necessary to conceive distinctly and grasp firmly the theory of this exceptional case. In the first place, it will be found to be of great assistance in rendering the more common case intelligible. And in the next place, the principle of the exception stretches wider, and embraces more cases, than might at first be supposed.

§ 5. There are but few commodities which are naturally and necessarily limited in supply. But any commodity whatever may be artificially so. Any commodity may be the subject of a monopoly like tea, in this country, up to 1834; tobacco in France, salt and opium in British India, at present. The price of a monopolized commodity is commonly supposed to be arbitrary; depending on the will of the monopolist, and limited only (as in Mr. De Quincey's case of the musical box in the wilds of America) by the buyer's extreme estimate of its worth to himself. This is in one sense true, but forms no exception, nevertheless, to the dependence on the value of supply and demand. The monopolist can fix the value as high as he pleases, short of what the consumer either could not or would not pay; but he can only do so by limiting the supply. The Dutch East India Company obtained a monopoly price for the produce of the Spice Islands, but to do so they were obliged, in good seasons, to destroy a portion of the crop. Had they persisted in selling all that they produced, they must have forced a market by reducing the price, so low, perhaps, that they would have received for the larger quantity a less total return than for the smaller : at least they showed that such was their opinion by destroying the surplus. Even on Lake Superior, Mr. De Quincey's huckster could not have sold his box for sixty guineas, if he had possessed two musical boxes and desired to sell them both. Supposing the cost price of each to be six guineas, he would have taken seventy for the two in preference to sixty for one; that is, although his monopoly was the closest possible, he would have sold the boxes at thirty-five guineas each, notwithstanding that sixty was not beyond the buyer's estimate of the article for his purposes. Monopoly value, therefore, does not depend on any peculiar principle, but is a mere variety of the ordinary case of demand and supply.

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

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

course.

Finally, there are commodities of which, though capable of being increased or diminished to a great, and even an unlimited extent, the value never depends upon anything but demand and supply. This is the case, in particular, with the commodity Labour: of the value of which we have treated copiously in the preceding Book: and there are many cases besides in which we shall find it necessary to call in this principle to solve difficult questions of exchange value. This will be particularly exemplified when we treat of International Values; that is, of the terms of interchange between things produced in different countries, or, to speak more generally, in distant places. But into these questions we cannot enter until we shall have examined the case of commodities which can be increased in quantity indefinitely and at pleasure; and shall have determined by what law, other than that of Demand and Supply, the permanent or average values of such commodities are regulated. This we shall do in the next chapter.

CHAPTER III.

OF COST OF PRODUCTION, IN ITS RELATION TO VALUE. §1. WHEN the production of a commodity is the effect of labour and expenditure, whether the commodity is susceptible of unlimited multiplication or not, there is a minimum value which is the essential condition of its being permanently produced. The value at any particular time is the result of supply and demand; and is always that which is necessary to create a market for the existing supply. But unless that value is sufficient to repay the Cost of Production, and to afford, besides, the ordinary expectations of profit, the commodity will not continue to be produced. Capitalists will not go on permanently producing at a loss. They will not even go on producing at a profit less than they can live upon. Persons whose capital is already embarked, and cannot easily be extricated, will persevere for a considerable time without profit, and have been known to persevere even at a loss, in hopes of better times. But they will not do so indefinitely, or when there is nothing to indicate that

times are likely to improve. No new capital will be invested in an employment, 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 produces in the prospect of loss. Whoever does so, does it under a miscalculation, which he corrects as fast as he is able.

When a commodity is not only made by labour and capital, but can be made by them in indefinite quantity, this Necessary Value, the minimum with which the producers will be content, is also, if competition is free, the maximum which they can expect. If the value of a commodity is such that it repays the cost of production not only with the customary, but with a higher rate of profit, capital rushes to share in this extra gain, and by increasing the supply of the article reduces its value. This is not a mere supposition or surmise, but a fact familiar to those conversant with commercial operations. Whenever a new line of business presents itself, offering a hope of unusual profits, and whenever any established trade or manufacture is believed to be yielding a greater profit than customary, there is sure to be in a short time so large a production or importation of the commodity, as not only destroys the extra profit, but generally goes beyond the mark, and sinks the value as much too low as it had before been raised too high; until the oversupply is corrected by a total or partial suspension of further production. As I have 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 different occupations.

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

* Supra, p. 284.