CHAPTER II.

Cost of Production the grand regulating Principle of Exchangeable Value and Price—Influence of Variations in the Demand for and Supply of Commodities over Prices—Influence of Monopolies—Average Price coincident with Cost of Production.

Having endeavoured in the foregoing chapter to elucidate the principles by which the value of commodities is determined when their supply is adjusted according to the effective demand, we shall now endeavour to appreciate the influence which variations of demand and supply have over their value and price.

To render what has to be stated on these subjects, and those that will be discussed in the following chapter, perfectly intelligible, we may anticipate so far on what will hereafter be more fully proved, as to assume that the wages earned by the labourers engaged in the different branches of industry are, all things considered, nearly equal, or differ only by an amount so small, that it may be neglected without occasioning any material error; and that the profits realised by those who undertake different businesses are in the same predicament. It is obvious, indeed, that such must be the case: if, on the one hand, the profits or wages of those who undertake or employ themselves in difficult, hazardous, dirty, unhealthy, or disagreeable businesses, were materially to exceed what was necessary to afford them a reasonable compensation for the greater skill required, or the peculiar inconveniences to which they are exposed, they would be in a better situation than others; and there would be an influx of capital and labourers into these businesses, until the natural equilibrium that, at an average, always subsists amongst the different branches of Edition: current; Page: [250] industry had been restored; and if, on the other hand, the inconveniences attending any particular business be not sufficiently compensated, some of those who carry it on will gradually withdraw from it, till, by the diminution of the supply, the price of the article is raised, so as to yield the necessary indemnification. The law of competition, or the attention paid by every individual to his own interest, will not allow this principle to be infringed upon for any considerable period; and, speaking generally, will insure the near equality, all things taken into account, of wages and profits in different occupations.

The cost, or real value, of commodities—denominated by Smith and Garnier natural or necessary price—is, as already seen, determined by the quantity of labour required to produce them and bring them to market. Now, it is quite obvious that this cost is the permanent and ultimate regulator of the exchangeable value or price of all commodities not subjected to monopolies, or of which the supply may be indefinitely increased according to the increase of demand. The market price of such commodities and their cost do not always coincide; but they cannot, for any considerable period, be far separated, and have a constant tendency to equality. If, owing to any single circumstance or combination of circumstances, a commodity be brought to market and exchanged for a greater amount, either of other commodities or of money, than is required to defray the cost of its production, including the customary rate of net profit at the time, its producers will obviously be placed in a relatively advantageous situation; and there will, in consequence, be an influx of capital into that particular department, until competition has sunk the value or price of the article to the level that will yield only customary profits on the capital employed in its production. And, on the other hand, were a commodity brought to market which did not exchange for so great an amount of other commodities, or of money, as was required to cover the cost of its production, its producers being placed Edition: current; Page: [251] in a relatively disadvantageous situation, would begin to withdraw from its production, and would continue to withdraw, until its value or price had risen so as to place them in the same situation as their neighbours, that is, to yield them the same rate of profit. No man will continue to produce commodities that sell for less than they cost, or for less than will indemnify him for his outlay, including therein the ordinary rate of profit on his capital. This is a limit below which prices cannot be permanently reduced; and if they were, for any considerable period, to rise above it, additional capital would be attracted to the advantageous business, and the increased supply of produce would reduce its price.

A demand, to be effectual, must be such as will cover the expense of production. If it be insufficient to do this, it will not occasion the production of commodities or make them be brought to market. But it is of importance to bear in mind, that whether the effectual demand, or the demand of those who have the power and the will to purchase, become ten or twenty times more extensive, or decline in the same proportion, still, if the cost of producing the commodities in demand continue the same, no permanent variation will be occasioned in their price. Were the demand for hats suddenly doubled, their price would be very greatly increased, and the hatters would, of course, make large profits; but these would immediately attract additional capital to the hat manufacture; an increased supply of hats would, consequently, be brought to market, and if no variation took place in their cost, their price would sink, in no very long time, to its former level. Suppose, on the other hand, that the demand for hats is increased tenfold, and that the cost of their production is diminished in the same proportion—we should, notwithstanding the increased demand, be able, before any very lengthened period had elapsed, to buy a hat for a tenth part of what it now costs. Again, suppose the demand for hats to decline, and Edition: current; Page: [252] the cost of their production to increase—the price would, notwithstanding the diminished demand, gradually rise, till it reached the point at which the hatters made customary profits on their capital, when it would stop. Variations of demand and supply occasion corresponding variations of price; but it is essential to remark that these variations are tempotary only. The cost of production is the grand regulator of price—the centre of all those transitory and evanescent oscillations on the one side and the other. Wherever industry is free, the competition of the producers is always directed to elevate or sink prices to this level.

In certain branches of industry, such, for example, as agriculture, which are liable to be seriously affected by changes of the seasons, and from which capital cannot be easily withdrawn, there is a longer interval than in others, before the market price of produce, and the cost of its production, are equalised; but that this equalisation will take place in the end, is sufficiently plain. Neither farmers, nor any other class of producers, will continue to bring produce to market, unless it sell for a price sufficient to remunerate them for the expense of its production, including profits. Nemo enim sanus debet velle impensam ac sumptum facere in culturam, si videt non posse refici.1 The cost of production is a limit below which prices cannot permanently sink, and above which they cannot permanently rise. When, on the one hand, an excess of supply depresses the price of corn below this limit, the occupiers of poor land are involved in the greatest difficulties; some of them are, in consequence, driven from their employment, and a smaller supply of corn being brought to market, prices are again elevated so as to yield customary profits to the cultivators of the poorest soils that are still kept under tillage. And when, on the other hand, prices rise above this natural limit, the cultivators gain more than customary profits, which necessarily Edition: current; Page: [253] attracts more individuals and more capital to agriculture, until the supply is so far increased, and the price so far depressed, that the cultivators obtain only these profits. This is the point at which average prices continue stationary, and about which market prices oscillate. If any great discovery were made in agriculture,—such, for instance, as should reduce the cost of cultivation a half—the price of agricultural produce would fall in the same proportion; and it would continue to sell at that reduced rate until the increase of population forced recourse to soils of a less degree of fertility. When this took place, prices would again rise. Why is the price of corn almost invariably higher in this country than in Poland? Is it not because of the greater cost of its production?

A pound weight of gold is at present worth about fifteen pounds of silver. It cannot, however, be said, that this is a consequence of the demand for gold being greater than the demand for silver; for the reverse is the fact. Neither can it be said to be occasioned by an absolute scarcity of gold; for those who choose to pay a sufficient price for it may obtain it in any quantity they please. The cause of the difference in the price of the two metals consists entirely in the circumstance of its costing about fifteen times as much to produce a pound of gold as to produce a pound of silver. That this is really the case, is plain from the admitted fact, that the producers of gold do not gain any greater profit than those of silver, iron, lead, or any other metal. They have no monopoly of its production. All individuals may send capital to California and Australia, and become producers of gold; and wherever this is the case, the principle of competition never fails of forcing the product to be sold at such a price as will merely pay the expenses of its production.

Were a set of men brought together from various countries, ignorant of each other’s wants, and of the labour and expense required to produce the commodities we may suppose each of them to possess, these would be bought and sold according to Edition: current; Page: [254] the wants and fancies of the parties. Under such circumstances, a pound of gold might be given for a pound of iron, and a gallon of wine for a gallon of small beer. As soon, however, as a system of commercial intercourse is established, and the wants of society and the powers of production come to be generally known, an end is put to this capricious method of bartering. Thousands of sellers then enter the market; and when such is the case, it is no longer possible to sell a pound of iron for a pound of gold; for the producers of iron will undersell each other, until, by their competition, they reduce its exchangeable value, or price, to the level of the cost of its production. This, in every civilised society, is the pivot on which exchangeable value always turns. It is usual for voyagers who touch at countries occupied by savages, to obtain valuable products in exchange for toys or trinkets, which it cost infinitely less to produce; but in all civilised and commercial countries, the proportion in which, generally speaking-commodities exchange for each other, depends on the comparative cost of their production.

Thus, then, it appears that no variation of demand, unaccompanied by a variation in the cost or real value of commodities, has any lasting influence over prices. If the cost of commodities be diminished, their price will be equally diminished, though the demand should be increased to any conceivable extent; while, if their cost be increased, their price will be equally increased, though the demand should sink to the lowest assignable limit.

But, as already seen, it must not be supposed that this adjustment of the supplies of produce, according to the variations in the effectual demand, is always speedily or easily brought about. The equalization is sure to take place in the end, but the process is often tedious and costly. If machinery be employed in a business which improvements in other branches of industry or changes of fashion have injuriously affected, and workpeople have been trained to it, both capitalists and labourers have a great repugnance to withdraw from the Edition: current; Page: [255] declining business. Their doing so involves loss and inconvenience, and they are prone to believe that something will cast up to improve their prospects. But they, notwithstanding, gradually withdraw to other employments, and in the end the business is either abandoned or reduced to its proper dimensions.

The circumstances connected with the supply of gold and silver are so very peculiar, that their value has often, for lengthened periods, but little dependence on the cost of their production. The latter has in general much of the nature of a gambling speculation. When gold or silver is found in any particular locality, its abundance, and the chances which it affords to adventurers of enriching themselves, are uniformly exaggerated, and an excess of hands is attracted to the pursuit of the metal. In such cases it commonly happens that while a few individuals engaged in the business make fortunes, the great mass make little or nothing. But most people being sanguine enough to think that they will be found in the fortunate class, the supply of bullion may be largely increased and its value reduced, even though the majority of those engaged in its production should be carrying on a losing employment. And though the discrepancy will be eventually rectified, yet, under the circumstances supposed, the value of bullion may become, for a considerable period, comparatively independent of the cost of its production.

It must always be remembered, that this reasoning applies to those commodities only which may be freely produced, and the quantity of which may, at the same time, be increased to any extent by fresh outlays of capital and labour; but there are circumstances under which the supply of commodities is strictly limited; and when such is the case, their price is no longer determined by their cost, but by the degree of their real or supposed utility, compared with the means and necessities of the buyers. In a desert, or a besieged city, a barrel of water or a pound of bread may be more valuable than Edition: current; Page: [256] a pipe of Burgundy or a pound of gold.1 And though artificial monopolies be rarely carried to so oppressive a height, the same principle holds with respect to the value of all commodities produced under them. When an individual, or company, obtains the exclusive privilege of furnishing any species of goods, the principle of competition is suspended with respect to them, and their price depends on the proportion in which they are brought to market, compared with the demand, and is not affected by anything else. If monopolists supplied the market liberally, or kept it as fully stocked as it would be were there no monopoly, commodities would sell at their natural price, and the monopoly would have no disadvantage further than the exclusion of the public from an employment which every one should have leave to carry on. In point of fact, however, the market is seldom or never fully supplied with monopolised commodities. All classes endeavour to get the highest price for their products; and, in this view, those who are protected by a monopoly against the risk of being undersold by others, uniformly keep the market understocked, or supply it with inferior articles, or both. Under such circumstances, the price of commodities, if they cannot be easily smuggled from abroad, or clandestinely produced at home, may be elevated to the highest point to which the competition of the buyers can raise it; and may, consequently, amount to five, ten, or twenty times the sum it would amount to, were competition permitted to operate on their production and sale. The will and the power of the purchasers to offer a high price forms the only limit to the rapacity of monopolists.

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Besides the commodities produced under artificial monopolies, there is another class, the supply of which cannot be increased by means of human industry, and whose price is not, therefore, dependent on the cost of their production. Ancient statues, vases, and gems, the pictures of the great masters, some varieties of wine produced in limited quantities on soils of a particular quality and exposure, and a few other commodities, belong to this class. As their supply cannot be increased, their price varies as the demand, and is independent on any other circumstance.

But with these exceptions, which, when compared to the mass of commodities, are of no great importance, wherever industry is unrestricted, and competition allowed to operate, the average price of the various products of art and industry coincides with the cost of their production. When a fall takes place in the market price of a commodity, we cannot say whether it is really advantageous, or whether a part of the wealth of the producers be not gratuitously transferred to the consumers, until we learn whether the cost of production be equally diminished. If this be the case, the fall of price will not be disadvantageous to the producers, and will be permanent; but if this be not the case—if the cost of production continue the same, the fall must be injurious to the producers, and prices will, in consequence, speedily regain their former level. In like manner, no rise of prices can be permanent, unless the cost of production has been increased. If that cost has remained stationary, or has not increased in a corresponding ratio, prices will decline as soon as the ephemeral causes of enhancement have disappeared.

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