As, however, differences of fertility slide into one another by insensible
gradations; and differences of accessibility, that is, of distance from
markets do the same; and since there is land so barren that it could not
pay for its cultivation at any price; it is evident that, whatever the
price may be, there must in any extensive region be some land which at
that price will just pay the wages of the cultivators, and yield to the
capital employed the ordinary profit, and no more. Until, therefore, the
price rises higher, or until some improvement raises that particular land
to a higher place in the scale of fertility, it can not pay any rent. It
is evident, however, that the community needs the produce of this quality
of land; since, if the lands more fertile or better situated than it could
have sufficed to supply the wants of society, the price would not have
risen so high as to render its cultivation profitable. This land,
therefore, will be cultivated; and we may lay it down as a principle that,
so long as any of the land of a country which is fit for cultivation, and
not withheld from it by legal or other factitious obstacles, is not
cultivated, the worst land in actual cultivation (in point of fertility
and situation together) pays no rent.
§ 3. The Rent of Land is the Excess of its Return above the Return to the
worst Land in Cultivation.
If, then, of the land in cultivation, the part which yields least return
to the labor and capital employed on it gives only the ordinary profit of
capital, without leaving anything for rent, a standard [i.e., the “margin
of cultivation”] is afforded for estimating the amount of rent which will
be yielded by all other land. Any land yields just as much more than the
ordinary profits of stock as it yields more than what is returned by the
worst land in cultivation. The surplus is what the farmer can afford to
pay as rent to the landlord; and since, if he did not so pay it, he would
receive more than the ordinary rate of profit, the competition of other
capitalists, that competition which equalizes the profits of different
capitals, will enable the landlord to appropriate it. The rent, therefore,
which any land will yield, is the excess of its produce, beyond what would
be returned to the same capital if employed on the worst land in
cultivation.
It has been denied that there can be any land in cultivation which pays no
rent, because landlords (it is contended) would not allow their land to be
occupied without payment. Inferior land, however, does not usually occupy,
without interruption, many square miles of ground; it is dispersed here
and there, with patches of better land intermixed, and the same person who
rents the better land obtains along with it the inferior soils which
alternate with it. He pays a rent, nominally for the whole farm, but
calculated on the produce of those parts alone (however small a portion of
the whole) which are capable of returning more than the common rate of
profit. It is thus scientifically true that the remaining parts pay no
rent.
This point seems to need some illustration. Suppose that all the
lands in a community are of five different grades of
productiveness. When the price of agricultural produce was such
that grades one, two, and three all came into cultivation, lands
of poorer quality would not be cultivated. When a man rents a
farm, he always gets land of varying degrees of fertility within
its limits. Now, in determining what he ought to pay as rent, the
farmer will agree to give that which will still leave him a profit
on his working capital; if in his fields he finds land which would
not enter into the question of rental, because it did not yield
more than the profit on working it, after he rented the farm he
would find it to his interest to cultivate it, simply because it
yielded him a profit, and because he was not obliged to pay rent
upon it; if required to pay rent for it, he would lose the
ordinary rate of profit, would have no reason for cultivating it,
of course, and would throw it out of cultivation. Moreover,
suppose that lands down to grade three paid rent when A took the
farm; now, if the price of produce rises slightly, grade four may
pay something, but possibly not enough to warrant any rent going
to a landlord. A will put capital on it for this return, but
certainly not until the price warrants it; that is, not until the
price will return him at least the cost of working the land,
_plus_ the profit on his outlay. But the community needed this
land, or the price would not have gone up to the point which makes
possible its cultivation even for a profit, without rent. There
must always be somewhere some land affected in just this way.
§ 4. —Or to the Capital employed in the least advantageous Circumstances.
Let us, however, suppose that there were a validity in this objection,
which can by no means be conceded to it; that, when the demand of the
community had forced up food to such a price as would remunerate the
expense of producing it from a certain quality of soil, it happened
nevertheless that all the soil of that quality was withheld from
cultivation, the increase of produce, which the wants of society required,
would for the time be obtained wholly (as it always is partially), not by
an extension of cultivation, but by an increased application of labor and
capital to land already cultivated.
Now we have already seen that this increased application of capital, other
things being unaltered, is always attended with a smaller proportional
return. The rise of price enables measures to be taken for increasing the
produce, which could not have been taken with profit at the previous
price. The farmer uses more expensive manures, or manures land which he
formerly left to nature; or procures lime or marl from a distance, as a
dressing for the soil; or pulverizes or weeds it more thoroughly; or
drains, irrigates, or subsoils portions of it, which at former prices
would not have paid the cost of the operation; and so forth. The farmer or
improver will only consider whether the outlay he makes for the purpose
will be returned to him with the ordinary profit, and not whether any
surplus will remain for rent. Even, therefore, if it were the fact that
there is never any _land_ taken into cultivation, for which rent, and that
too of an amount worth taking into consideration, was not paid, it would
be true, nevertheless, that there is always some _agricultural capital_
which pays no rent, because it returns nothing beyond the ordinary rate of
profit: this capital being the portion of capital last applied—that to
which the last addition to the produce was due; or (to express the
essentials of the case in one phrase) that which is applied in the least
favorable circumstances. But the same amount of demand and the same price,
which enable this least productive portion of capital barely to replace
itself with the ordinary profit, enable every other portion to yield a
surplus proportioned to the advantage it possesses. And this surplus it is
which competition enables the landlord to appropriate.
If land were all occupied, and of only one grade, the first
installment of labor and capital produced, we will say, twenty
bushels of wheat; when the price of wheat rose, and it became
profitable to resort to greater expense on the soil, a second
installment of the same amount of labor and capital when applied,
however, only yielded fifteen bushels more; a third, ten bushels
more; and a fourth, five bushels more. The soil now gives fifty
bushels only under the highest pressure. But, if it was profitable
to invest the same installment of labor and capital simply for the
five bushels that at first had received a return of twenty
bushels, the price must have gone up so that five bushels should
sell for as much as the twenty did formerly; so, _mutatis
mutandis_, of installments second and third. So that if the demand
is such as to require all of the fifty bushels, the agricultural
capital which produced the five bushels will be the standard
according to which the rent of the capital, which grew twenty,
fifteen, and ten bushels respectively, is measured. The principle
is exactly the same as if equal installments of capital and labor
were invested on four different grades of land returning twenty,
fifteen, ten, and five bushels for each installment. Or, as if in
the table on page 240, A, B, C, and D each represented different
installments of the same amount of labor and capital put upon the
same spot of ground, instead of being, as there, put upon
different grades of land.
The rent of all land is measured by the excess of the return to the whole
capital employed on it above what is necessary to replace the capital with
the ordinary rate of profit, or, in other words, above what the same
capital would yield if it were all employed in as disadvantageous
circumstances as the least productive portion of it: whether that least
productive portion of capital is rendered so by being employed on the
worst soil, or by being expended in extorting more produce from land which
already yielded as much as it could be made to part with on easier terms.
It will be true that the farmer requires the ordinary rate of profit on
the whole of his capital; that whatever it returns to him beyond this he
is obliged to pay to the landlord, but will not consent to pay more; that
there is a portion of capital applied to agriculture in such circumstances
of productiveness as to yield only the ordinary profits; and that the
difference between the produce of this and of any other capital of similar
amount is the measure of the tribute which that other capital can and will
pay, under the name of rent, to the landlord. This constitutes a law of
rent, as near the truth as such a law can possibly be; though of course
modified or disturbed, in individual cases, by pending contracts,
individual miscalculations, the influence of habit, and even the
particular feelings and dispositions of the persons concerned.
The law of rent, in the economic sense, operates in the United
States as truly as elsewhere, although there is no separate class
of landlords here. With us, almost all land is owned by the
cultivator; so that two functions, those of the landlord and
farmer, are both united in one person. Although one payment is
made, it is still just as distinctly made up of two parts, one of
which is a payment to the owner for the superior quality of his
soil, and the other a payment (to the same person, if the owner is
the cultivator) of profit on the farmer’s working capital. Land
which in the United States will only return enough to pay a profit
on this capital can not pay any rent. And land which can pay more
than a profit on this working capital, returns that excess as
rent, even if the farmer is also the owner and landlord. The
principle which regulates the amount of that excess—which is the
essential point—is the principle which determines the amount of
economic rent, and it holds true in the United States or Finland,
provided only that different grades of land are called into
cultivation. The governing principle is the same, no matter
whether a payment is made to one man as profit and to another as
rent, or whether the two payments are made to the same man in two
capacities. It has been urged that the law of rent does not hold
in the United States, because “the price of grain and other
agricultural produce has not risen in proportion to the increase
of our numbers, as it ought to have done if Ricardo’s theory were
true, but has fallen, since 1830, though since that time our
population has been more than tripled.”(181) This overlooks the
fact that we have not even yet taken up all our best agricultural
lands, so that for some products the law of diminishing
productiveness has not yet shown itself. The reason is, that the
extension of our railway system has only of late years brought the
really good grain-lands into cultivation. The fact that there has
been no rise in agricultural products is due to the enormous
extent of marvelously fertile grain-lands in the West, and to the
cheapness of transportation from those districts to the seaboard.
For a general understanding of the law of rent the following table
will show how, under constant increase of population (represented
by four different advances of population, in the first column),
first the best and then the poorer lands are brought into
cultivation. We will suppose (1) that the most fertile land, A, at
first pays no rent; then (2), when more food is wanted than land A
can supply, it will be profitable to till land B, but which, as
yet, pays no rent. But if eighteen bushels are a sufficient return
to a given amount of labor and capital, then when an equal amount
of labor and capital engaged on A returns twenty-four bushels, six
of that are beyond the ordinary profit, and form the rent on land
A, and so on; C will next be the line of comparison, and then D;
as the poorer soils are cultivated, the rent of A increases:
Population A B C D
Increase.
24 18 12 6
bushels bushels bushels bushels
Total Rent in Total Rent in Total Rent in Total Rent in
product Bushels product Bushels product Bushels product Bushels
I. 24 0 .. .. .. .. .. ..
II. 24 6 18 0 .. .. .. ..
III. 24 12 18 6 12 0 .. ..
IV. 24 18 18 12 12 6 6 0
§ 5. Opposing Views of the Law of Rent.
Under the name of rent, many payments are commonly included, which are not
a remuneration for the original powers of the land itself, but for capital
expended on it. The buildings are as distinct a thing from the farm as the
stock or the timber on it; and what is paid for them can no more be called
rent of land than a payment for cattle would be, if it were the custom
that the landlord should stock the farm for the tenant. The buildings,
like the cattle, are not land, but capital, regularly consumed and
reproduced; and all payments made in consideration for them are properly
interest.
But with regard to capital actually sunk in improvements, and not
requiring periodical renewal, but spent once for all in giving the land a
permanent increase of productiveness, it appears to me that the return
made to such capital loses altogether the character of profits, and is
governed by the principles of rent. It is true that a landlord will not
expend capital in improving his estate unless he expects from the
improvement an increase of income surpassing the interest of his outlay.
Prospectively, this increase of income may be regarded as profit; but,
when the expense has been incurred and the improvement made, the rent of
the improved land is governed by the same rules as that of the unimproved.
Mr. Carey (as well as Bastiat) has declared that there is a law of
increasing returns from land. He points out that everything now
existing could be reproduced to-day at a less cost than that
involved in its original production, owing to our advance in
skill, knowledge, and all the arts of production; that, for
example, it costs less to make an axe now than it did five hundred
years ago; so also with a farm, since a farm of a given amount of
productiveness can be brought into cultivation at less cost to-day
than that originally spent upon it. The gain of society has, we
all admit, been such that we produce almost everything at a less
cost now than long ago; but to class a farm and an axe together
overlooks, in the most remarkable way, the fact that land can not
be created by labor and capital, while axes can, and that too
indefinitely. Nor can the _produce_ from the land be increased
indefinitely at a diminishing cost. This is sometimes denied by
the appeal to facts: “It can be abundantly proved that, if we take
any two periods sufficiently distant to afford a fair test,
whether fifty or one hundred or five hundred years, the production
of the land relatively to the labor employed upon it has
progressively become greater and greater.”(182) But this does not
prove that an existing tendency to diminishing returns has not
been more than offset by the progress of the arts and
improvements. “The advance of a ship against wind and tide is [no]
proof that there is no wind and tide.”
In a work entitled “The Past, the Present, and the Future,” Mr. Carey
takes [a] ground of objection to the Ricardo theory of rent, namely, that
in point of historical fact the lands first brought under cultivation are
not the most fertile, but the barren lands. “We find the settler
invariably occupying the high and thin lands requiring little clearing and
no drainage. With the growth of population and wealth, other soils
yielding a larger return to labor are always brought into activity, with a
constantly increasing return to the labor expended upon them.”
In whatever order the lands come into cultivation, those which when
cultivated yield the least return, in proportion to the labor required for
their culture, will always regulate the price of agricultural produce; and
all other lands will pay a rent simply equivalent to the excess of their
produce over this minimum. Whatever unguarded expressions may have been
occasionally used in describing the law of rent, these two propositions
are all that was ever intended by it. If, indeed, Mr. Carey could show
that the return to labor from the land, agricultural skill and science
being supposed the same, is not a diminishing return, he would overthrow a
principle much more fundamental than any law of rent. But in this he has
wholly failed.
Another objection taken against the law of diminishing returns,
and so against the law of rent, is that the potential increase of
food, e.g., of a grain of wheat, is far greater than that of
man.(183) No one disputes the fact that one grain of wheat can
reproduce itself more times than man, and that too in a geometric
increase; but not without land. A grain of wheat needs land in
which it can multiply itself, and this necessary element of its
increase is limited; and it is the very thing which limits the
multiplication of the grains of wheat. On the same piece of land,
one can not get more than what comes from one act of reproduction
in the grain. If one grain produces 100 of its kind, doubling the
capital will not repeatedly cause a geometric increase in the
ratio of reproduction of each grain on this same land, so that one
grain, by one process, produces of its kind 200, 400, 800, or
1,600, because you can not multiply the land in any such ratio as
would accompany this potential reduplication of the grain. This
objection would not seem worth answering, were it not that it
furnishes some difficulty to really honest inquirers.
Others, again, allege as an objection against Ricardo, that if all land
were of equal fertility it might still yield a rent. But Ricardo says
precisely the same. It is also distinctly a portion of Ricardo’s doctrine
that, even apart from differences of situation, the land of a country
supposed to be of uniform fertility would, all of it, on a certain
supposition, pay rent, namely, if the demand of the community required
that it should all be cultivated, and cultivated beyond the point at which
a further application of capital begins to be attended with a smaller
proportional return.
This is simply the question, before discussed, whether, if only
one class of land were cultivated, some agricultural capital would
pay rent or not. It all depends on the fact whether population—and
so the demand for food—has increased to the point where it calls
out a recognition of the diminishing productiveness of the soil.
In that case different capitals would be invested, so that there
would be different returns to the same amount of capital; and the
prior or more advantageous investments of capital on the land
would yield more than the ordinary rate of profit, which could be
claimed as rent.
A. L. Perry(184) admits the law of diminishing returns, but holds
that, “as land is capital, and as every form of capital may be
loaned or rented, and thus become fruitful in the hands of
another, the rent of land does not differ essentially in its
nature from the rent of buildings in cities, or from the interest
of money.” Henry George admits Ricardo’s law of rent to its full
extent, but very curiously says: “Irrespective of the increase of
population, the effect of improvements in methods of production
and exchange is to increase rent.... The effect of labor-saving
improvements will be to increase the production of wealth. Now,
for the production of wealth, two things are required, labor and
land. Therefore, the effect of labor-saving improvements will be
to _extend the demand for land_, and, wherever the limit of the
quality of land in use is reached, to bring into cultivation lands
of less natural productiveness, or to extend cultivation on the
same lands to a point of lower natural productiveness. And thus,
while the primary effect of labor-saving improvements is to
increase the power of labor, the secondary effect is to extend
cultivation, and, where this lowers the margin of cultivation, to
increase rent.”(185) Francis Bowen(186) rejects Ricardo’s law, and
says, “Rent depends, not on the increase, but on the distribution,
of the population”—asserting that the existence of large cities
and towns determines the amount of rent paid by neighboring
land.(187)
§ 6. Rent does not enter into the Cost of Production of Agricultural
Produce.
Rent does not really form any part of the expenses of [agricultural]
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. The
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
favorable circumstances. This land or capital pays, as we have seen, no
rent, but the expenses to which it is subject cause all other land or
agricultural capital to be subjected to an equivalent expense in the form
of 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.
Soils are of every grade: some, which if cultivated, might replace
the capital, but give no profit; some give a slight but not an
ordinary profit; some, the ordinary profit. That is, “there is a
point up to which it is profitable to cultivate, and beyond which
it is not profitable to cultivate. The price of corn will not, for
any long time, remain at a higher rate than is sufficient to cover
with ordinary profit the cost of that portion of the general crop
which is raised at greatest expense.”(188) For similar reasons the
price will not remain at a lower rate. If, then, the cost of
production of grain is determined by that land which replaces the
capital, yields only the ordinary profit, and pays no rent, rent
forms no part of this cost, since that land does not and can not
pay any rent. McLeod,(189) however, says it is not the cost of
production which regulates the value of agricultural produce, but
the value which regulates the cost.
BOOK III. EXCHANGE.
Chapter I. Of Value.
§ 1. Definitions of Value in Use, Exchange Value, and Price.
It is evident that, of the two great departments of Political Economy, the
production of wealth and its distribution, the consideration of Value has
to do with the latter alone; and with that only so far as competition, and
not usage or custom, is the distributing agency.
The use of a thing, in political economy, means its capacity to satisfy a
desire, or serve a purpose. Diamonds have this capacity in a high degree,
and, unless they had it, would not bear any price. Value in use, or, as
Mr. De Quincey calls it, _teleologic_ value, is the extreme limit of value
in exchange. The exchange value of a thing may fall short, to any amount,
of its value in use; but that it can ever exceed the value in use implies
a contradiction; it supposes that persons will give, to possess a thing,
more than the utmost value which they themselves put upon it, as a means
of gratifying their inclinations.
The word Value, when used without adjunct, always means, in political
economy, value in exchange.
Exchange value requires to be distinguished from Price. Writers have
employed Price to express the value of a thing in relation to money—the
quantity of money for which it will exchange. By the price of a thing,
therefore, we shall henceforth understand its value in money; by the
value, or exchange value of a thing, its general power of purchasing; the
command which its possession gives over purchasable commodities in
general. What is meant by command over commodities in general? The same
thing exchanges for a greater quantity of some commodities, and for a very
small quantity of others. A coat may exchange for less bread this year
than last, if the harvest has been bad, but for more glass or iron, if a
tax has been taken off those commodities, or an improvement made in their
manufacture. Has the value of the coat, under these circumstances, fallen
or risen? It is impossible to say: all that can be said is, that it has
fallen in relation to one thing, and risen in respect to another. Suppose,
for example, that an invention has been made in machinery, by which
broadcloth could be woven at half the former cost. The effect of this
would be to lower the value of a coat, and, if lowered by this cause, it
would be lowered not in relation to bread only or to glass only, but to
all purchasable things, except such as happened to be affected at the very
time by a similar depressing cause. Those [changes] which originate in the
commodities with which we compare it affect its value in relation to those
commodities; but those which originate in itself affect its value in
relation to all commodities.
There is such a thing as a general rise of prices. All commodities may
rise in their money price. But there can not be a general rise of values.
It is a contradiction in terms. A can only rise in value by exchanging for
a greater quantity of B and C; in which case these must exchange for a
smaller quantity of A. All things can not rise relatively to one another.
If one half of the commodities in the market rise in exchange value, the
very terms imply a fall of the other half; and, reciprocally, the fall
implies a rise. Things which are exchanged for one another can no more all
fall, or all rise, than a dozen runners can each outrun all the rest, or a
hundred trees all overtop one another. A general rise or a general fall of
prices is merely tantamount to an alteration in the value of money, and is
a matter of complete indifference, save in so far as it affects existing
contracts for receiving and paying fixed pecuniary amounts.
Before commencing the inquiry into the laws of value and price, I have one
further observation to make. I must give warning, once for all, that the
cases I contemplate are those in which values and prices are determined by
competition alone. In so far only as they are thus determined, can they be
reduced to any assignable law. The buyers must be supposed as studious to
buy cheap as the sellers to sell dear.
The reader is advised to study the definitions of value given by
other writers. Cairnes(190) defines value as “the ratio in which
commodities in open market are exchanged against each other.” F.
A. Walker(191) holds that “value is the power which an article
confers upon its possessor, irrespective of legal authority or
personal sentiments, of commanding, in exchange for itself, the
labor, or the products of the labor, of others.” Carey(192) says,
“Value is the measure of the resistance to be overcome in
obtaining those commodities or things required for our purposes—of
the power of nature over man.” Value is thus, with him, the
antithesis of wealth, which is (according to Carey) the power of
man over nature. In this school, value is the service rendered by
any one who supplies the article for the use of another. This is
also Bastiat’s idea,(193) “_le rapport de deux services
echanges_.” Following Bastiat, A. L. Perry(194) defines value as
“always and everywhere the relation of mutual purchase established
between two services by their exchange.” Roscher(195) explains
exchange value as “the quality which makes them exchangeable
against other goods.” He also makes a distinction between utility
and value in use: “Utility is a quality of things themselves, in
relation, it is true, to human wants. Value in use is a quality
imputed to them, the result of man’s thought, or his view of them.
Thus, for instance, in a beleaguered city, the stores of food do
not increase in utility, but their value in use does.”
Levasseur(196) regards value as “the relation resulting from
exchange”—_le rapport resultant de l’echange_. Cherbuliez(197)
asserts that “the value of a product or of a service can be
expressed only as the products or services which it obtains in
exchange.... If I exchange the thing A against B, A is the value
of B, B is the value of A.” Jevons(198) defines value as
“proportion in exchange.”
§ 2. Conditions of Value: Utility, Difficulty of Attainment, and
Transferableness.
That a thing may have any value in exchange, two conditions are necessary.
1. It must be of some use; that is (as already explained), it must conduce
to some purpose, satisfy some desire. No one will pay a price, or part
with anything which serves some of his purposes, to obtain a thing which
serves none of them. 2. But, secondly, the thing must not only have some
utility, there must also be some difficulty in its attainment.
The question is one as to the conditions essential to the
existence of any value. Very justly Cairnes(199) adds also a third
condition, “the possibility of transferring the possession of the
articles which are the subject of the exchange.” For instance, a
cargo of wheat at the bottom of the sea has value in use and
difficulty of attainment, but it is not transferable. Jevons
(following J. B. Say) maintains that “value depends entirely on
utility.” If utility means the power to satisfy a desire, things
which merely have utility and no difficulty of attainment could
have no exchange value.(200) F. A. Walker(201) believes that
“value depends wholly on the relation between demand and supply.”
Carey(202) holds that value depends merely on the cost of
reproduction of the given article. Roscher(203) finds that
exchange value is “based on a combination of value in use with
cost value.” Cherbuliez(204) calls the conditions of value two,
“the ability to give satisfaction, and inability of attainment
without effort. The first element is subjective; it is determined
wholly by the needs or desires of the parties to the exchange. The
second is objective; it depends upon material considerations,
which are the conditions of the existence of the thing, and upon
which the needs of the persons exchanging have no influence
whatever.” It is, as usual, one of Cherbuliez’s clear expositions.
A. L. Perry(205) states that, “while value always takes its rise
in the _desires_ of men, it is never realized except through the
_efforts_ of men, and through these efforts as mutually
exchanged.”
The difficulty of attainment which determines value is not always the same
kind of difficulty: (1.) It sometimes consists in an absolute limitation
of the supply. There are things of which it is physically impossible to
increase the quantity beyond certain narrow limits. Such are those wines
which can be grown only in peculiar circumstances of soil, climate, and
exposure. Such also are ancient sculptures; pictures by the old masters;
rare books or coins, or other articles of antiquarian curiosity. Among
such may also be reckoned houses and building-ground, in a town of
definite extent.
De Quincey(206) has presented some ingenious diagrams to represent
the operations of the two constituents of value in each of the
three following cases: U represents the power of the article to
satisfy some desire, and D difficulty of attainment. In the first
case, exchange value is not hindered by D from going up to any
height, and so it rises and falls entirely according to the force
of U. D being practically infinite, the horizontal line, exchange
value, is not kept down by D, but it rises just as far as U, the
desires of purchasers, may carry it.
[Illustration: Vertical line D, paralleled by shorter vertical line U, D
and U connected at top of U by horizontal line.]
(2.) But there is another category (embracing the majority of all things
that are bought and sold), in which the obstacle to attainment consists
only in the labor and expense requisite to produce the commodity. Without
a certain labor and expense it can not be had; but, when any one is
willing to incur these, there needs be no limit to the multiplication of
the product. If there were laborers enough and machinery enough, cottons,
woolens, or linens might be produced by thousands of yards for every
single yard now manufactured.
In case (2) the horizontal line, representing exchange value,
follows the force of D entirely. The utility of the article is
very great, but the value is only limited by the difficulty of
obtaining it. So far as U is concerned, exchange value can go up a
great distance, but will go no higher than the point where the
article can be obtained. The dotted lines underneath the
horizontal line indicate that the exchange value of articles in
this class tend to fall in value.
[Illustration: Parallel vertical lines U and D, U being longer, joined by
several horizontal lines of Exchange Value.]
(3.) There is a third case, intermediate between the two preceding, and
rather more complex, which I shall at present merely indicate, but the
importance of which in political economy is extremely great. There are
commodities which can be multiplied to an indefinite extent by labor and
expenditure, but not by a fixed amount of labor and expenditure. Only a
limited quantity can be produced at a given cost; if more is wanted, it
must be produced at a greater cost. To this class, as has been often
repeated, agricultural produce belongs, and generally all the rude produce
of the earth; and this peculiarity is a source of very important
consequences; one of which is the necessity of a limit to population; and
another, the payment of rent.
In case (3) articles like agricultural produce have a very great
power to satisfy desires, and if scarce would have a high value.
So far as U is concerned, here also, as in case (2), exchange
value might mount upward to almost any height, but it can go no
higher than D permits. In commodities of this class, affected by
the law of diminishing returns, the tendency is for D to increase,
and so for exchange value to rise, as indicated by the dotted
lines above that of the exchange value.
[Illustration: Same as before.]
§ 3. Commodities limited in Quantity by the law of Demand and Supply:
General working of this Law.
These being the three classes, in one or other of which all things that
are bought and sold must take their place, we shall consider them in their
order. And first, of things absolutely limited in quantity, such as
ancient sculptures or pictures.
Of such things it is commonly said that their value depends on their
scarcity; others say that the value depends on the demand and supply. But
this statement requires much explanation. The supply of a commodity is an
intelligible expression: it means the quantity offered for sale; the
quantity that is to be had, at a given time and place, by those who wish
to purchase it. But what is meant by the demand? Not the mere desire for
the commodity. A beggar may desire a diamond; but his desire, however
great, will have no influence on the price. Writers have therefore given a
more limited sense to demand, and have defined it, the wish to possess,
combined with the power of purchasing.(207) To distinguish demand in this
technical sense from the demand which is synonymous with desire, they call
the former _effectual_ demand.
General supply consists in the commodities offered in exchange for
other commodities; general demand likewise, if no money exists,
consists in the commodities offered as purchasing power in
exchange for other commodities. That is, one can not increase the
demand for certain things without increasing the supply of some
articles which will be received in exchange for the desired
commodities. Demand is based upon the production of articles
having exchange value, in its economic sense; and the measure of
this demand is necessarily the quantity of commodities offered in
exchange for the desired goods. General demand and supply are thus
reciprocal to each other. But as soon as money, or general
purchasing power, is introduced, Mr. Cairnes(208) defines “demand
as the desire for commodities or services, seeking its end by an
offer of general purchasing power; and supply, as the desire for
general purchasing power, seeking its end by an offer of specific
commodities or services.” But many persons find a difficulty
because they insist upon separating the idea of supply from that
of demand, owing to the fact that producers seem to be a distinct
class in the community, different from consumers. That they are in
reality the same persons can be easily explained by the following
statement: “A certain number of people, A, B, C, D, E, F, etc.,
are engaged in industrial occupations—A produces for B, C, D, E,
F; B for A, C, D, E, F; C for A, B, D, E, F, and so on. In each
case the producer and the consumers are distinct, and hence, by a
very natural fallacy, it is concluded that the whole body of
consumers is distinct from the whole body of producers, whereas
they consist of precisely the same persons.”
But in regard to demand and supply of particular commodities (not
general demand and supply), the increase of the demand is not
necessarily followed by an increased supply, or _vice versa_. Out
of the total production (which constitutes general demand) a
varying amount, sometimes more, sometimes less, may be directed by
the desires of men to the purchase of some given thing. This
should be borne in mind, in connection with the future discussion
of over-production. The identity of general demand with general
supply shows there can be no general over-production: but so long
as there exists the possibility that the demand for a particular
commodity may diminish without a corresponding effect being
thereby produced on the supply of that commodity, by a necessary
connection, we see that there may be over-production of particular
commodities; that is, a production in excess of the demand.
The proper mathematical analogy [between demand and supply] is that of an
_equation_. 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 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.
Mr. Cairnes(209) finally defined market value as the price “which is
sufficient, and no more than sufficient, to carry the existing supply
over, with such a surplus as circumstances may render advisable, to meet
the new supplies forthcoming,” which is nothing more than a paraphrase of
the words “existing or expected supply” just used by Mr. Mill. It seems
unnecessary, therefore, that Mr. Cairnes should have added: “According to
Mr. Mill, the _actual market price_ is the price which equalizes supply
and demand in a given market; as I view the case, the ‘proper market
price’ is the price which equalizes supply and demand, _not_ as existing
in the particular market, but in the larger sense which I have assigned to
the terms. To this price the _actual market price_ will, according to my
view, approximate, in proportion to the intelligence and knowledge of the
dealers.”
Adam Smith, who introduced the expression “effectual demand,” employed it
to denote the demand of those who are willing and able to give for the
commodity what he calls its natural price—that is, the price which will
enable it to be permanently produced and brought to market.(210)
This, then, is the Law of Value, with respect to all commodities not
susceptible of being multiplied at pleasure.
§ 4. Miscellaneous Cases falling under this Law.
There are but few commodities which are naturally and necessarily limited
in supply. But any commodity whatever may be artificially so. 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. Monopoly value, therefore, does not depend on any
peculiar principle, but is a mere variety of the ordinary case of demand
and supply.
Again, though there are few commodities which are at all times and forever
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, can not 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 can not 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 can not 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 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. |
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